What is Economic Efficiency?

The term economic efficiency refers to the process by which resources are maximized to generate more productive value than they use. For example, a country would be considered economically efficient if it uses its resources to provide products and services for its citizens that exceed the value of the resources themselves.

Features of an Economically Efficient System

Different economic theorists have varying ideas of what an economically efficient system should entail. A society or business that boasts features of economic efficiency must maintain a balance between means (resources) and ends (products). In other words, in the most efficient system, the end product must remain equal to or exceed the means, while in an inefficient system, the means are not being used to their full potential, and are therefore not generating sufficient output.

The Role of Value

Economic efficiency is often based on ideas of value, which is a largely subjective idea. For example, when referring to a system that uses more or less than it needs, or produces more or less than it should, the terms “more” and “less” are relative to the overall value placed on certain goods and services. For this reason, efficiency is not only measured by the physical products produced or resources used, but by the value of the ends in proportion to the value of the means.

The Role of Government

Some of the variations in opinion about value and efficiency arise as a result of differing views on the desired level of government involvement in an economic system. Some believe too much government involvement distorts levels of efficiency, and others believe that the practice of laissez-faire (i.e. less government involvement in the economy) is actually what negatively influences these systems. The advocation of limited government is a feature of classical and neoclassical economics, while the push for a larger government role is typically associated with Keynesian economics.

Market Economies

Despite the differing views of what contributes to economic efficiency or inefficiency, the most widely accepted view is that market economics (those generally associated with laissez-faire policy) are capable of the most efficiency; but, that some government oversight is necessary in order to deal with any fiscal problems or imperfections in the market system. As a result, the most efficient system would be considered a blend of classical and Keynesian economics.

Reform Movements

Many reform movements have been put in place to help increase economic efficiency. These movements, called microeconomic reforms, often aim to remove the deficiencies or flaws in the market system that prevent businesses from operating in the most efficient way possible. However, these reforms are largely theoretical, as no evidence fully proves that concentrated efforts to remove a flaw in one area will not simply cause another area to become less efficient. In short, the relationship between economic systems is itself a delicate balance.

The disagreements arising from subjective ideas of value and market economies also extend to the relationship between economic efficiency and social justice. That is to say, some people view the workings of an efficient economy as standing in contrast to a moral society, while others view the two systems to exist in a kind of symbiotic relationship. This too affects the different opinions about what actions should be taken to form the most ideal economic system.