Economic efficiency

In microeconomics, 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:

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.

Strands of thought

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 complementary—either 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

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

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.

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. 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

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

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.


Economic efficiency can be characterized in many ways:

Applications of these principles include:

See also


  1. ^ Thomas. Government Regulation of Business. 2013, McGraw-Hill.
  2. ^ Economics, fourth edition, Alain Anderton, p281
  3. ^ Barr, N. (2004). Economics of the welfare state. New York, Oxford University Press (USA).
  4. ^ Sen, A. (1993). Markets and freedom: Achievements and limitations of the market mechanism in promoting individual freedoms. Oxford Economic Papers, 45(4), 519–541.

External links

1965 Soviet economic reform

The 1965 Soviet economic reform, sometimes called the Kosygin reform (Russian: Косыгинская реформа) or Liberman reform, were a set of planned changes in the economy of the Soviet Union (USSR). A centerpiece of these changes was the introduction of profitability and sales as the two key indicators of enterprise success. Some of an enterprise's profits would go to three funds, used to reward workers and expand operations; most would go to the central budget.

The reforms were introduced politically by Alexei Kosygin—who had just become Premier of the Soviet Union following the removal of Nikita Khrushchev—and ratified by the Central Committee in September 1965. They reflected some long-simmering wishes of the USSR's mathematically oriented economic planners, and initiated the shift towards a more decentralized economic planning process.

Belgian Blue

The Belgian Blue (French: 'Blanc-Bleu Belge', Dutch: 'Belgisch Witblauw') is a breed of beef cattle from Belgium. It may also be known as the Race de la Moyenne et Haute Belgique.:95 Alternative names for this breed include Belgian Blue-White; Belgian White and Blue Pied; Belgian White Blue; Blue; and Blue Belgian. The Belgian Blue's extremely lean, hyper-sculpted, ultra-muscular physique is termed "double-muscling". The double-muscling phenotype is a heritable condition resulting in an increased number of muscle fibers (hyperplasia), instead of the (normal) enlargement of individual muscle fibers (hypertrophy).This particular trait is shared with another breed of cattle known as Piedmontese. Both of these breeds have an increased ability to convert feed into lean muscle, which causes these particular breeds' meat to have a reduced fat content and reduced tenderness. The Belgian Blue is named after their typically blue-grey mottled hair colour; however, its actual colour can vary from white to black.


Brownism was a phrase used in an article by BBC reporter Mark Easton to describe the political ideology of Gordon Brown. The related personal identifier "Brownite" has been used to describe people close to Brown. In an opiniated article, Anthony Giddens claimed that in contrast to Blairite, the adjective used to refer to the political ideology of Tony Blair, Brownites tend to be less enthusiastic about market driven reforms such as tuition fees and foundation hospitals and more keen on the role of the state, less critical of Labour's links to the unions and critical of media management techniques such as the use of spin doctors. Will Hutton opined: "Like Tony Blair he [Gordon Brown] is a believer in a pluralist and fair society, social mobility, and marrying economic efficiency with social justice".

Consumer protection

In regulatory jurisdictions that provide for it (comprising most or all developed countries with free market economies), consumer protection is a group of laws and organizations designed to ensure the rights of consumers as well as fair trade, competition and accurate information in the marketplace. The laws are designed to prevent the businesses that engage in fraud or specified unfair practices from gaining an advantage over competitors. They may also provide additional protection for those most vulnerable in society. Consumer protection laws are a form of government regulation that aim to protect the rights of consumers. For example, a government may require businesses to disclose detailed information about products—particularly in areas where safety or public health is an issue, such as food.

Consumer protection is linked to the idea of consumer rights and to the formation of consumer organizations, which help consumers make better choices in the marketplace and get help with consumer complaints. Other organizations that promote consumer protection include government organizations and self-regulating business organizations such as consumer protection agencies and organizations, ombudsmen, the Federal Trade Commission in America and Better Business Bureaus in America and Canada, etc.

A consumer is defined as someone who acquires goods or services for direct use or ownership rather than for resale or use in production and manufacturing.Consumer interests can also be protected by promoting competition in the markets which directly and indirectly serve consumers, consistent with economic efficiency, but this topic is treated in competition law. Consumer protection can also be asserted via non-government organizations and individuals as consumer activism.

Customs union

A customs union was defined by the General Agreement on Tariffs and Trade as a type of trade bloc which is composed of a free trade area with a common external tariff.The participant countries set up common external trade policy, but in some cases they use different import quotas. Common competition policy is also helpful to avoid competition deficiency.Purposes for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries.

It is the third stage of economic integration.

Customs unions are established through trade pacts.

Economic Justice

Justice in economics is a subcategory of welfare economics with models frequently representing the ethical-social requirements of a given theory, whether "in the large", as of a just social order, or "in the small", as in the equity of "how institutions distribute specific benefits and burdens". That theory may or may not elicit acceptance. In the Journal of Economic Literature classification codes 'justice' is scrolled to at JEL: D63, wedged on the same line between 'Equity' and 'Inequality' along with 'Other Normative Criteria and Measurement'. Categories above and below the line are Externalities and Altruism.Some ideas about justice and ethics overlap with the origins of economic thought, often as to distributive justice and sometimes as to Marxian analysis. The subject is a topic of normative economics and philosophy and economics. In early welfare economics, where mentioned, 'justice' was little distinguished from maximization of all individual utility functions or a social welfare function. As to the latter, Paul Samuelson (1947), expanding on work of Abram Bergson, represents a social welfare function in general terms as any ethical belief system required to order any (hypothetically feasible) social states for the entire society as "better than", "worse than", or "indifferent to" each other. Kenneth Arrow (1963) showed a difficulty of trying to extend a social welfare function consistently across different hypothetical ordinal utility functions even apart from justice. Utility maximization survives, even with the rise of ordinal-utility/Pareto theory, as an ethical basis for economic-policy judgments in the wealth-maximization criterion invoked in law and economics.Amartya Sen (1970), Kenneth Arrow (1983), Serge-Christophe Kolm (1969, 1996, 2000), and others have considered ways in which utilitarianism as an approach to justice is constrained or challenged by independent claims of equality in the distribution of primary goods, liberty, entitlements, opportunity, exclusion of antisocial preferences, possible capabilities, and fairness as non-envy plus Pareto efficiency. Alternate approaches have treated combining concern for the worst off with economic efficiency, the notion of personal responsibility and (de)merits of leveling individual benefits downward, claims of intergenerational justice, and other non-welfarist/Pareto approaches. Justice is a subarea of social choice theory, for example as to extended sympathy, and more generally in the work of Arrow, Sen, and others.A broad reinterpretation of justice from the perspective of game theory, social contract theory, and evolutionary naturalism is found in works of Ken Binmore (1994, 1998, 2004) and others. Arguments on fairness as an aspect of justice have been invoked to explain a wide range of behavioral and theoretical applications,supplementing earlier emphasis on economic efficiency (Konow, 2003).

Economic union

An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour) and a common external trade policy. When an economic union involves unifying currency it becomes an economic and monetary union.

Purposes for establishing an economic union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries.

Economic union is established through trade pact.


Efficiency is the (often measurable) ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without waste. In more mathematical or scientific terms, it is a measure of the extent to which input is well used for an intended task or function (output). It often specifically comprises the capability of a specific application of effort to produce a specific outcome with a minimum amount or quantity of waste, expense, or unnecessary effort. Efficiency refers to very different inputs and outputs in different fields and industries.

Efficiency is very often confused with effectiveness. In general, efficiency is a measurable concept, quantitatively determined by the ratio of useful output to total input. Effectiveness is the simpler concept of being able to achieve a desired result, which can be expressed quantitatively but does not usually require more complicated mathematics than addition. Efficiency can often be expressed as a percentage of the result that could ideally be expected, for example if no energy were lost due to friction or other causes, in which case 100% of fuel or other input would be used to produce the desired result. In some cases efficiency can be indirectly quantified with a non-percentage value, e.g. specific impulse.

A common but confusing way of distinguishing between efficiency and effectiveness is the saying "Efficiency is doing things right, while effectiveness is doing the right things." This saying indirectly emphasizes that the selection of objectives of a production process is just as important as the quality of that process. This saying popular in business however obscures the more common sense of "effectiveness", which would/should produce the following mnemonic: "Efficiency is doing things right; effectiveness is getting things done." This makes it clear that effectiveness, for example large production numbers, can also be achieved through inefficient processes if, for example, workers are willing or used to working longer hours or with greater physical effort than in other companies or countries or if they can be forced to do so. Similarly, a company can achieve effectiveness, for example large production numbers, through inefficient processes if it can afford to use more energy per product, for example if energy prices or labor costs or both are lower than for its competitors.

Efficiency is often measured as the ratio of useful output to total input, which can be expressed with the mathematical formula r=P/C, where P is the amount of useful output ("product") produced per the amount C ("cost") of resources consumed. This may correspond to a percentage if products and consumables are quantified in compatible units, and if consumables are transformed into products via a conservative process. For example, in the analysis of the energy conversion efficiency of heat engines in thermodynamics, the product P may be the amount of useful work output, while the consumable C is the amount of high-temperature heat input. Due to the conservation of energy, P can never be greater than C, and so the efficiency r is never greater than 100% (and in fact must be even less at finite temperatures).

Efficient Taxation of Income

The Efficient Taxation of Income is an approach to taxation that would apply different tax rates for property-type income and earned income from work. Earned income would be taxed at a flat rate of 10%, while property-type income would be taxed at 30%. The plan was created by Dale Jorgenson, Samuel W. Morris University Professor at Harvard University, and Kun-Young Yun, Professor of Economics at Yonsei University, Korea. Jorgenson states that the plan would provide big gains in economic efficiency that would result from making the tax treatment of income from corporate, non-corporate and household property the same. The plan has been discussed before the United States Congress but a bill has not been introduced.Under Efficient Taxation of Income, each dollar of new business investment would generate a credit against taxes on business income. The rates for these credits would make tax burdens on all income sources the same. Taxes on new investments by households would be collected by car dealers, real estate developers, and other providers. These would not apply to existing home owners and would protect property values. Jorgenson states that the Efficient Taxation of Income could be implemented without cumbersome transition rules. In the United States, the tax treatment of Social Security and Medicare contributions and benefits would be unaffected, as would the treatment of private pension plans. Jorgenson estimates that the total one-off gain from Efficient Taxation of Income in the U.S. would be $4,900 billion, while adoption of the Flat Tax would yield only $2,060 billion. The gains underscore the benefits of shifting investment to higher-yielding assets and reflect greater investment and faster economic growth.

Ethical socialism

Ethical socialism is a political philosophy that appeals to socialism on ethical and moral grounds as opposed to economic, egoistic and consumeristic grounds. It emphasizes the need for a morally conscious economy based upon the principles of service, cooperation and social justice while opposing possessive individualism. In contrast to socialism inspired by rationalism, historical materialism, neoclassical economics and Marxist theory which base their appeals for socialism on grounds of economic efficiency, rationality, or historical inevitability, ethical socialism focuses on the moral and ethical reasons for advocating socialism.

Ethical socialism had a profound impact on the social democratic movement and reformism during the later half of the 20th century, particularly in Great Britain. Ethical socialism is distinct in its focus on criticism of the ethics of capitalism and not merely criticism of the economic, systemic and material issues of capitalism.The term ethical socialism initially originated as a pejorative by the Marxist economist Rosa Luxemburg against reformist revisionist Marxist Eduard Bernstein and his supporters, who evoked Kantian liberal ideals and ethical arguments in favor of socialism. Self-recognized ethical socialists soon arose in Britain such as Christian socialist R. H. Tawney and its ideals were connected to Christian socialist, Fabian and guild socialist ideals. Ethical socialism was an important ideology within the British Labour Party. Ethical socialism has been publicly supported by British Prime Ministers Ramsay MacDonald, Clement Attlee and Tony Blair.When the Social Democratic Party of Germany (SPD) renounced Marxism during the Godesberg Program in the 1950s, ethical socialism became the official philosophy within the SPD.


The term inefficiency generally refers to an absence of efficiency. It has several meanings depending on the context in which it is used:

Allocative inefficiency - Allocative inefficiency is a situation in which the distribution of resources between alternatives does not fit with consumer taste (perceptions of costs and benefits). For example, a company may have the lowest costs in "productive" terms, but the result may be inefficient in allocative terms because the "true" or social cost exceeds the price that consumers are willing to pay for an extra unit of the product. This is true, for example, if the firm produces pollution (see also external cost). Consumers would prefer that the firm and its competitors produce less of the product and charge a higher price, to internalize the external cost.

Distributive Inefficiency - refers to the inefficient distribution of income and wealth within a society. Decreasing marginal utilities of wealth in theory suggests that more egalitarian distributions of wealth are more efficient than unegalitarian distributions. Distributive inefficiency is often associated with economic inequality.

Economic inefficiency - refers to a situation where "we could be doing a better job," i.e., attaining our goals at lower cost. It is the opposite of economic efficiency. In the latter case, there is no way to do a better job, given the available resources and technology.

Keynesian inefficiency - might be defined as incomplete use of resources (labor, capital goods, natural resources, etc.) because of inadequate aggregate demand. We are not attaining potential output, while suffering from cyclical unemployment. We could do a better job if we applied deficit spending or expansionary monetary policy.

Pareto inefficiency - Pareto efficiency is a situation in which one person can not be made better off without making anyone else worse off. In practice, this criterion is difficult to apply in a constantly changing world, so many emphasize Kaldor-Hicks efficiency and inefficiency: a situation is inefficient if someone can be made better off even after compensating those made worse off, regardless of whether the compensation actually occurs.

Productive inefficiency - says that we could produce the given output at a lower cost—or could produce more output for given cost. For example, a company that is inefficient will have higher operating costs and will be at a competitive disadvantage (or have lower profits than other firms in the market).

Resource-market inefficiency - refers to barriers that prevent full adjustment of resource markets, so that resources are either unused or misused. For example, structural unemployment results from barriers of mobility in labor markets which prevent workers from moving to places and occupations where there are job vacancies. Thus, unemployed workers can co-exist with unfilled job vacancies.

X-inefficiency - refers to inefficiency in the "black box" of production, connecting inputs to outputs. This type of inefficiency says that we could be organizing people or production processes more effectively. Often problems of "morale" or "bureaucratic inertia" cause X-inefficiency.Productive inefficiency, Resource-market inefficiency and X-inefficiency might be analyzed using Data Envelopment Analysis and similar methods.

Microeconomic reform

Microeconomic reform (or often just economic reform) comprises policies directed to achieve improvements in economic efficiency, either by eliminating or reducing distortions in individual sectors of the economy or by reforming economy-wide policies such as tax policy and competition policy with an emphasis on economic efficiency, rather than other goals such as equity or employment growth.

"Economic reform" usually refers to deregulation, or at times to reduction in the size of government, to remove distortions caused by regulations or the presence of government, rather than new or increased regulations or government programs to reduce distortions caused by market failure. As such, these reform policies are in the tradition of laissez faire, emphasizing the distortions caused by government, rather than in ordoliberalism, which emphasizes the need for state regulation to maximize efficiency.


Oncom (Indonesian pronunciation: [ɔnˈtʃɔm]) is one of the traditional staple foods of West Javan (Sundanese) cuisine, Indonesia. There are two kinds of oncom: red oncom and black oncom. Oncom is closely related to tempeh; both are foods fermented using mold.Usually oncom is made from the by-products from the production of other foods: soy pulp left from making tofu, peanut press cake left after the oil has been pressed out, cassava tailings when extracting the starch (pati singkong), coconut press cake remaining after oil has been pressed out or when coconut milk has been produced. Since oncom production uses by-products to make food, it increases the economic efficiency of food production.

Red oncom has been found to reduce the cholesterol levels of rats.Black oncom is made by using Rhizopus oligosporus while red oncom is made by using Neurospora intermedia var. oncomensis. It is the only human food produced from Neurospora.

Scientific management

Scientific management is a theory of management that analyzes and synthesizes workflows. Its main objective is improving economic efficiency, especially labor productivity. It was one of the earliest attempts to apply science to the engineering of processes and to management. Scientific management is sometimes known as Taylorism after its founder, Frederick Winslow Taylor.Taylor began the theory's development in the United States during the 1880s and '90s within manufacturing industries, especially steel. Its peak of influence came in the 1910s; Taylor died in 1915 and by the 1920s, scientific management was still influential but had entered into competition and syncretism with opposing or complementary ideas.

Although scientific management as a distinct theory or school of thought was obsolete by the 1930s, most of its themes are still important parts of industrial engineering and management today. These include: analysis; synthesis; logic; rationality; empiricism; work ethic; efficiency and elimination of waste; standardization of best practices; disdain for tradition preserved merely for its own sake or to protect the social status of particular workers with particular skill sets; the transformation of craft production into mass production; and knowledge transfer between workers and from workers into tools, processes, and documentation.

Small-scale agriculture

Small-scale agriculture has been practiced ever since the Neolithic Revolution. More recently it is an alternative to factory farming or more broadly, intensive agriculture or unsustainable farming methods that are prevalent in primarily first world countries. Environmental Health Perspectives has noted that "Sustainable agriculture is not merely a package of prescribed methods. More important, it is a change in mind set whereby agriculture acknowledges its dependence on a finite natural resource base--including the finite quality of fossil fuel energy that is now a critical component of conventional farming systems." Small-scale agriculture includes a number of sustainable agriculture practices such as:

organic farming, which may follow rules and regulations set by International Federation of Organic Agriculture Movements (IFOAM)

permaculture, which provides a holistic methodology for farm design

arable land use, arable land (from Latin arare, to plough ) is a form of agricultural land use, meaning land that can be (and is) used for growing crops. David Ricardo incorporated the idea of arable land into economic theory.

non-arable land use

pastoral, pastoral refers to the lifestyle of shepherds and pastoralists, moving livestock around larger areas of land according to seasons and availability of water and feed.

rainfed agriculture

biodynamic agriculture was developed by Rudolf Steiner, which consists of using herbal and homeopathic preparations for the cow dung/manure that is used extensively on the crops for fertilizer.The methods of food sustainability and economics are hotly debated. This is a question between agricultural economics and the draining of the largely unaccounted natural capital.

Stock Exchange Executive Council

The Stock Exchange Executive Council (SEEC) of the People's Republic of China was established to improve the efficiency of the securities market in mainland China.

According to research by Nottle (1993), the re-emergence of securities markets commenced under the introduction of the economic reform programme. The initiative was announced by then party Vice Premier Deng Xiaoping in 1978; under the plan market forces would be brought to bear on the Chinese economy and China's "doors would be opened" to foreign capital and entrepreneurs.

Under this economic reform, a number of experiments have been conducted over the part decades in order to facilitate the development of securities markets.

September 1984, the first joint stock company and then one was commenced in Shanghai in 1985 and in Shenzhen in 1987

Another experiment consisted of establishing securities trading markets such as, over-the-counter (OTC) market for shares and bonds was established in 1986.To further improve the economic efficiency of the Chinese securities markets, eventually the Stock Exchange Executive Council (SEEC) was formed in March 1989 to create a nationwide treasury bond trading system (Securities Trading Automated Quotations System (STAQs) which was established on December 1990.

Time and motion study

A time and motion study (or time-motion study) is a business efficiency technique combining the Time Study work of Frederick Winslow Taylor with the Motion Study work of Frank and Lillian Gilbreth (the same couple as is best known through the biographical 1950 film and book Cheaper by the Dozen). It is a major part of scientific management (Taylorism). After its first introduction, time study developed in the direction of establishing standard times, while motion study evolved into a technique for improving work methods. The two techniques became integrated and refined into a widely accepted method applicable to the improvement and upgrading of work systems. This integrated approach to work system improvement is known as methods engineering and it is applied today to industrial as well as service organizations, including banks, schools and hospitals.

Water supply and sanitation in Uruguay

This article was last comprehensively updated in September 2007. Please feel free to update it if need be.

Uruguay is the only country in Latin America that has achieved quasi-universal coverage of access to safe drinking water supply and adequate sanitation. Water service quality is considered good, with practically all localities in Uruguay receiving disinfected water on a continuous basis. 70% of wastewater collected by the national utility was treated. Given these achievements, the government's priority is to improve the efficiency of services and to expand access to sewerage, where appropriate, in areas where on-site sanitation is used.


X-inefficiency is the divergence of a firm’s observed behavior in practice, influenced by a lack of competitive pressure, from efficient behavior assumed or implied by economic theory. The concept of X-inefficiency was introduced by Harvey Leibenstein.

This page is based on a Wikipedia article written by authors (here).
Text is available under the CC BY-SA 3.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.