- Describe efficiency from the perspective of an economist.
Economic efficiency is the use of resources so as to maximize the production of goods and service.] An economic system is said to be more efficient than another (in relative terms) if it can provide more goods and services for society without using more resources. In absolute terms, a situation can be called economically efficient if:
- No one can be made better off without making someone else worse off (commonly referred to as Pareto efficiency).
- No additional output can be obtained without increasing the amount of inputs.
- Production proceeds at the lowest possible per-unit cost.
Economic efficiency is a term typically used in microeconomics when discussing product. Production of a unit of good is economically efficient when that unit of good is produced at the lowest possible cost. Economics by Parkin and Bade give a useful introduction to the difference between economic efficiency and technological efficiency:
- There are two concepts of efficiency: Technological efficiency occurs when it is not possible to increase output without increasing inputs. Economic efficiency occurs when the cost of producing a given output is as low as possible.
Technological efficiency is an engineering matter. Given what is technologically feasible, something can or cannot be done. Economic efficiency depends on the prices of the factors of production. Something that is technologically efficient may not be economically efficient. But something that is economically efficient is always technologically efficient.
A key point to understand is the idea that economic efficiency occurs “when the cost of producing a given output is as low as possible”. There’s a hidden assumption here, and that is the assumption that all else being equal. A change that lowers the quality of the good while at the same time lowers the cost of production does not increase economic efficiency. The concept of economic efficiency is only relevant when the quality of goods being produced is unchanged.
- Why are producer and consumer surpluses important in determining market equilibrium?
As the quantity of a good in the market increases, its marginal benefit decreases. As such, the consumer surplus for a given quantity declines as it approaches the actual market price and quantity. If a producer can “price discriminate, it can capture the entire economic surplus.
- Should market efficiency always be the goal of policy setters? Why or why not? What might an alternative be?
I believe that market efficiency shouldn’t be a main goal of policy setters. The reason is that a policy looks great on paper but when set in to effect they hardly work. As they cause shortage or surpluses, because the policy will create ether price ceilings or floors. Either way the policy will not work as it looks on paper, and that is why I believe that policy setter shouldn’t make efficiency a main goal.
Priscilla's Microeconomic Blog 