Economic Efficiency - Explained
What is Economic Efficiency?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is Economic Efficiency?
Economic efficiency refers to an economic situation where there is an optimum allocation or distribution of resources with minimum waste and inefficiency.
What is Allocative Efficiency?
Allocative efficiency seeks to produce an amount that maximizes the benefit to society. An allocatively efficient economy produces an "optimal mix" of commodities. Allocative efficiency occurs in a firm when the marginal cost of producing a good equals the marginal benefit of the good to consumers.
Further, additional allocation of resources to one entity in an economically efficient economy would have negative effects on the other entities.
What is Productive Efficiency?
Productive efficiency occurs when a productive unit (firm or economy) cannot increase production of one good without sacrificing production of another good.
What is Pareto Efficiency?
Pareto efficiency occurs when there is a reallocation of resources where either someone gains and no one loses or gainers gain more than losers lose.
Factors influencing economic efficiency
In the microeconomy, actors affecting the efficient allocation of resources include:
- price levels,
- rates of employment, and
- interest rates.
Related Topics
- 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