Economic efficiency

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Efficiency (economics)
)

In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts:

These definitions are not equivalent: a

optimal when it maximizes desired outputs (such as utility
) given available inputs.

Standards of thought

There are two main standards 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

long-run equilibrium of perfect competition
.

average total cost. When drawing diagrams for businesses, 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. For an extensive discussion of many other types of productive efficiency and its measures (Farrell, Hyperbolic, Directional, Cost, Revenue, Profit, Additive, etc.) and their relationships.[2]

Mainstream views

The mainstream view is that

]

The

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

Advocates of

Austrian school
.

Advocates of an expanded government role follow instead in alternative streams of progressivism; 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.

Criteria

Economic efficiency can be characterized in many ways:

Applications of these principles include:

See also

References

  1. ^ Thomas. Government Regulation of Business. 2013, McGraw-Hill.
  2. ^ Sickles, R., & Zelenyuk, V. (2019). Measurement of Productivity and Efficiency: Theory and Practice. Cambridge: Cambridge University Press. doi:10.1017/9781139565981
  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

  • Patnaik, Prabhat (1997). "On the Concept of Efficiency". Economic and Political Weekly. October 25, 1997.

External links