Economic efficiency

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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:

Theory of Economic efficiency Abstract:: we always think that is related to time. In fact, personal work of economic efficiency is only related to the person's individual ability, before the ability did not change, people work in the economic efficiency is a constant. This is just like before the mechanical structure has not changed, its mechanical efficiency is a constant. Would you think the machine doesn't work, the efficiency is zero?Of course not. Also, you can know why people get the efficiency of economic benefits is certain. main body:

Efficiency = product/(input resources+ input labor + input tool )

It can refer to mechanical efficiency formula: Mechanical efficiency refers to the ratio of useful work and total energy, expressed with symbols η is calculated as η = W useful / W total * 100% But for the working efficiency of the individual, we always think that is related to time. In fact, personal work of economic efficiency is only related to the person's individual ability, before the ability did not change, people work in the economic efficiency is a constant. This is just like before the mechanical structure has not changed, its mechanical efficiency is a constant. A person working overtime every day, every day like a mechanical use, can only increase the output of him in a certain period of time, and can't make his economic efficiency. The efficiency is the ratio of a person's output and input


variety of products on the market have exchange rate, we call for general exchange coefficient.

Exchange coefficient = product 1/ product 2

According to the previous formula

efficiency = product/(input resources+ input labor + input tool ) If the two products need put into the same (labor, resources, tool).

efficiency product 1 = exchange coefficient* efficiency product 2 That is to say, we can know that we are in the same input by exchanging coefficient which mode of production is the maximum economic efficiency.

Because in every country. Money expressed the exchange coefficients of each product exchange coefficient. Also expressed in the form of price system, and so in market economy countries, everyone can find their economic efficiency of the largest production mode through market prices. As the author is suffering from academic persecution, if sympathize with the author that stick to the truth of heresy, please forward the new theory of the authors. [1]

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[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 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[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. 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. [2] 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[3] 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.[4][5]

Schools of thought[edit]

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[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.


Economic efficiency can be characterized in many ways, e.g.,

Applications of these principles include:

See also[edit]


  1. ^ Tan Lidong <The economics of happiness>, publishing house of China university of politics and law (January 2012)
  2. ^ Thomas. Government Regulation of Business. 2013, McGraw-Hill.
  3. ^ Economics, fourth edition, Alain Anderton, p281
  4. ^ Barr, N. (2004). Economics of the welfare state. New York, Oxford University Press (USA).
  5. ^ Sen, A. (1993). Markets and freedom: Achievements and limitations of the market mechanism in promoting individual freedoms. Oxford Economic Papers, 45(4), 519–541.

Further reading[edit]