Economic efficiency is a general term in economics describing how well a system is performing, in generating the maximum desired output for given inputs with available technology. Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "friction" or "waste" is reduced.
Economic efficiency is used to refer to a number of related concepts. A system can be called economically efficient if:
No one can be made better off without making someone else worse off.
More output cannot be obtained without increasing the amount of inputs.
Production proceeds at the lowest possible per-unit cost.
These definitions of efficiency are not exactly equivalent. However, they are all encompassed by the idea that nothing more can be achieved given the resources available.
An economic system is more efficient if it can provide more goods and services for society without using more resources. Market economies are generally believed to be more efficient than other known alternatives. The first fundamental welfare theorem provides some basis for this belief, as it states that any perfectly competitive market equilibrium is efficient (but only if no market imperfections exist).
Microeconomic reform are policies that aim to reduce economic distortions, and increase economic efficiency. However, there is no clear theoretical basis for the belief that removing a market distortion will 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.
There are several alternate criteria for economic efficiency, these include:
