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 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. When drawing diagrams for firms using a single-price model, 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.
The mainstream view is that market economies are generally believed to be closer to efficient than other known alternatives 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.
Efficiency = product / (input resources+ input labor + input tool)
This can refer to the mechanical efficiency of the formula:
Mechanical efficiency refers to the ratio of the total power of useful power, represented by the symbol η is calculated as
η = W useful / W total * 100%
But for personal productivity, we always think about the time . Indeed, the economic efficiency of the individual work only on the ability of human individuals, no change in the ability of the former, one of the economic efficiency of the work is constant . This mechanical efficiency of machinery in the absence of a certain modification is the same.
This efficiency is one of the ratio of output to input.
There are various products on the market to the exchange ratio, we call for the general exchange coefficient.
Exchange coefficient = Product 1 / 2 product (Formula 2-4-3)
According to the efficiency of the preceding efficiency formula = product / (labor + resources + tools),
If two products into its meaning the same (labor + resources + tools).
1 = exchange factor productivity * Product Efficiency 2 (type 2-4-4)
That we can know our greatest economic efficiency in the same mode of production inputs through this proportion exchange coefficients.
Because national banknotes, banknote exchange coefficients expressing each product, the exchange coefficient is expressed in the form of price, so in a market economy country, everyone can find their own market prices to the greatest economic efficiency of production.
Economic efficiency can be characterized in many ways, e.g.,
- Allocative efficiency
- Distributive efficiency
- Dynamic efficiency
- Informational efficiency is used to characterize financial markets
- Kaldor–Hicks efficiency
- Pareto efficiency
- Productive efficiency
- Optimisation of a social welfare function
- Utility maximization
Applications of these principles include:
- Thomas. Government Regulation of Business. 2013, McGraw-Hill.
- Economics, fourth edition, Alain Anderton, p281
- Barr, N. (2004). Economics of the welfare state. New York, Oxford University Press (USA).
- Sen, A. (1993). Markets and freedom: Achievements and limitations of the market mechanism in promoting individual freedoms. Oxford Economic Papers, 45(4), 519–541.
- Tan Lidong <The economics of happiness>, publishing house of China university of politics and law (January 2012)