What is Economic Efficiency?

Economic efficiency refers to an economic situation where there is optimum allocation or distribution of resources with minimum wastage and lesser inefficiency. The editions made in the betterment of one entity in an economically efficient economy would have negative effects on the other entities. Just like the variable costs, products or goods are manufactured at the least costs at the time of production.

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Why Economic Efficiency is Important?

There are a few terms like allocational efficiency, production efficiency, and Pareto efficiency that inform about the different stages of economic efficiency. This economical term is more of a theoretical concept. In order to determine if the economy is being efficient in its operations, economists consider focusing on the waste, that is the amount of loss lying between actual scenario and pure efficiency. Economics relate economic efficiency with the scarcity of resources. Hence, the economy doesnt have adequate resources to inform if the economy is operating at its best throughout. There should be an optimum distribution of these scarce resources so that the economic needs are met in an effective manner. However, there should be minimum or no wastage of resources as well. The most feasible state of economic efficiency would involve the welfare of the total population in the most efficient manner, that further leads to the maximum welfare offered by using the given resources.

Economic Efficiency and Welfare

In order to know how efficient the economy is, economists rely on assumptions about the welfare of population, and the way it caters to customers. When the economy is highly efficient, the improvement in the condition of one sector will deter the condition or welfare of another. Considering this, welfare is related to the standard of living and how comfortably people are living in the economy. Even if the economy reaches the stage of economic equilibrium, all the individuals living in the economy wont experience the same standard of living. Paretos efficiency has nothing to do with issues concerned with equality in a specific economy. It merely emphasizes on arriving at a point where there are optimal operations taking place by using scarce or inadequate resources. A distribution strategy takes place when the condition of one entity has to be worsened for improving the condition of the other entity, and this is the time when economic efficiency occurs.

Factors influencing economic efficiency

Whether the economic efficiency is getting better or worse, researchers measure this by analyzing several market variables including price levels, rates of employment, and interest rates. In case, there is a proper allocation of resources as per the market demand, one can also take into consideration the quantum of waste during the process of production.

Related Topics

• Budget Constraint
• Radner Equilibrium
• Opportunity Cost
• Opportunity Set
• Marginal Analysis
• Utility

• Self Interest
• Cost-Benefit Analysis
• Enlightened Self-Interest
• Fisher's Separation Theorem
• Ratchet Effect

• Total Utility (Economics)
• Efficiency Principle
• Expected Utility
• Subjective Theory of Value
• Positional Goods
• Utilitarianism
• Indifference Curve
• Time Preference Theory of Interest
• Incentives
• Marginal Benefit

• Diminishing Marginal Utility
• Sunk Costs
• Production Possibilities Frontier
• Law of Diminishing Returns
• Economic Efficiency
• Efficiency Theory
• Productive Efficiency
• Capacity Utilization Rate
• Allocative Efficiency
• Pareto Efficient
• Comparative Advantage
• Criticisms of the Economic Approach
• Behavioral Economics
• Normative Economics
• Positive Economics
• Invisible Hand
• Sunk cost