Economic efficiency

From Wikipedia, the free encyclopedia

Economic efficiency is, roughly speaking, a situation in which nothing can be
improved without something else being hurt. Depending on the context, it is usually
one of the following two related concepts:

Allocative or Pareto efficiency: any changes made to assist one person would harm
another.
Productive efficiency: no additional output can be obtained without increasing the
amount of inputs, and production proceeds at the lowest possible average total
cost.
These definitions are not equivalent: a market or other economic system may be
allocatively but not productively efficient, or productively but not allocatively
efficient. There are also other definitions and measures. All characterizations of
economic efficiency are encompassed by the more general engineering concept that a
system is efficient or optimal when it maximizes desired outputs (such as utility)
given available inputs.

Contents [hide]
1 Strands of thought
1.1 Allocative and productive efficiency
1.2 Mainstream views
1.3 Schools of thought
1.4 Microeconomic reform
2 Criteria
3 See also
4 References
Strands of thought[edit]
There are two main strains of thought on economic efficiency, which respectively
emphasize the distortions created by governments (and reduced by decreasing
government involvement) and the distortions created by markets (and reduced by
increasing government involvement). These are at times competing, at times
complementaryeither debating the overall level of government involvement, or the
effects of specific government involvement. Broadly speaking, this dialog takes
place in the context of economic liberalism or neoliberalism, though these terms
are also used more narrowly to refer to particular views, especially advocating
laissez faire.

Further, there are differences in views on microeconomic versus macroeconomic

efficiency, some advocating a greater role for government in one sphere or the
other.

Allocative and productive efficiency[edit]

A market can be said to have allocative efficiency if the price of a product that
the market is supplying is equal to the marginal value consumers place on it, and
equals marginal cost. In other words, when every good or service is produced up to
the point where one more unit provides a marginal benefit to consumers less than
the marginal cost of producing it.

Because productive resources are scarce, the resources must be allocated to various
Industries in just the right amounts, otherwise too much or too little output gets
produced.[1] When drawing diagrams for firms, allocative efficiency is satisfied if
output is produced at the point where marginal cost is equal to average revenue.
This is the case for the long-run equilibrium of perfect competition.

Productive efficiency occurs when units of goods are being supplied at the lowest
possible average total cost. When drawing diagrams for firms, this condition is
satisfied if the equilibrium is at the minimum point of the average total cost
curve. This is again the case for the long run equilibrium of perfect competition.

Mainstream views[edit]
The mainstream view is that market economies are generally believed to be closer to
efficient than other known alternatives[2] and that government involvement is
necessary at the macroeconomic level (via fiscal policy and monetary policy) to
counteract the economic cycle following Keynesian economics. At the microeconomic
level there is debate about how to achieve efficiency, with some advocating laissez
faire, to remove government distortions, while others advocate regulation, to
reduce market failures and imperfections, particularly via internalizing
externalities.[citation needed]

The first fundamental welfare theorem provides some basis for the belief in
efficiency of market economies, as it states that any perfectly competitive market
equilibrium is Pareto efficient. The assumption of perfect competition means that
this result is only valid in the absence of market imperfections, which are
significant in real markets.[citation needed] Furthermore, Pareto efficiency is a
minimal notion of optimality and does not necessarily result in a socially
desirable distribution of resources, as it makes no statement about equality or the
overall well-being of a society.[3][4]

Schools of thought[edit]
Advocates of limited government,
role in the economy) follow from
liberalism, and are particularly
classical economics (through the
onwards), and with the heterodox
in the form laissez faire (little or no government
the 19th century philosophical tradition classical
associated with the mainstream economic schools of
1870s) and neoclassical economics (from the 1870s
Austrian school.

Advocates of an expanded government role follow instead in alternative streams of

progressivism; in the Anglosphere (English-speaking countries, notably the United
States, United Kingdom, Canada, Australia and New Zealand) this is associated with
institutional economics and, at the macroeconomic level, with Keynesian economics.
In Germany the guiding philosophy is Ordoliberalism, in the Freiburg School of
economics.

Microeconomic reform[edit]
Microeconomic reform is the implementation of policies that aim to reduce economic
distortions via deregulation, and move toward economic efficiency. However, there
is no clear theoretical basis for the belief that removing a market distortion will
always increase economic efficiency. The theory of the second best states that if
there is some unavoidable market distortion in one sector, a move toward greater
market perfection in another sector may actually decrease efficiency.

Criteria[edit]
Economic efficiency can be characterized in many ways:

Allocative efficiency
Distributive efficiency
Dynamic efficiency
Informational efficiency is used to characterize financial markets
KaldorHicks efficiency
Pareto efficiency
Productive efficiency
Optimisation of a social welfare function
Utility maximization
X-inefficiency
Applications of these principles include:

Efficient-market hypothesis
Microeconomic reform
Production theory basics
Welfare economics
See also[edit]
Business efficiency
Compensation principle
Distribution (economics)
Economic equilibrium
References[edit]
Jump up ^ Thomas. Government Regulation of Business. 2013, McGraw-Hill.
Jump up ^ Economics, fourth edition, Alain Anderton, p281
Jump up ^ Barr, N. (2004). Economics of the welfare state. New York, Oxford
University Press (USA).
Jump up ^ Sen, A. (1993). Markets and freedom: Achievements and limitations of the
market mechanism in promoting individual freedoms. Oxford Economic Papers, 45(4),
519541.
Categories: Economic efficiency
Navigation menu
Not logged inTalkContributionsCreate accountLog inArticleTalkReadEditView
historySearch

Search Wikipedia
Go
Main page
Contents
Featured content
Current events
Random article
Donate to Wikipedia
Wikipedia store
Interaction
Help
About Wikipedia
Community portal
Recent changes
Contact page
Tools
What links here
Related changes
Upload file
Special pages
Permanent link
Page information
Wikidata item
Cite this page
Print/export
Create a book
Download as PDF
Printable version
Languages
???????
?????????
Catala
etina
????????
Espanol
Euskara
?????
???????
??????
Bahasa Indonesia
Italiano
?????
???????
???????
Latvieu
Nederlands
???
Norsk
Ozbekcha/???????
Polski
???????
Shqip
Suomi
Trke
??????????
Edit links
This page was last edited on 13 May 2017, at 18:09.
Text is available under the Creative Commons Attribution-ShareAlike License;
additional terms may apply. By using this site, you agree to the Terms of Use and
Privacy Policy. Wikipedia is a registered trademark of the Wikimedia Foundation,
Inc., a non-profit organization.
Privacy policyAbout WikipediaDisclaimersContact WikipediaDevelopersCookie
statementMobile viewEnable previews
Wikimedia Foundation Powered by MediaWiki