what is economic efficiency 
economic efficiency is when all goods and factors of production in an economy are distributed or allocated to their most valuable uses and waste is eliminated or minimized a system is considered economically efficient if the factors of production are used at a level at or near their capacity in contrast a system is considered economically inefficient if available factors are not used to their capacity wasted resources and deadweight losses may cause economic inefficiencies investopedia lara antalunderstanding economic efficiencyeconomic efficiency implies an economic state in which every resource is optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency when an economy is economically efficient any changes made to assist one entity would harm another in terms of production goods are produced at their lowest possible cost as are the variable inputs of production some terms that encompass phases of economic efficiency include allocative efficiency productive efficiency distributive efficiency and pareto efficiency a state of economic efficiency is essentially theoretical a limit that can be approached but never reached instead economists look at the amount of loss referred to as waste between pure efficiency and reality to see how efficiently an economy functions economic efficiency and scarcitythe principles of economic efficiency are based on the concept that resources are scarce therefore there are not sufficient resources to ensure that all aspects of an economy function at their highest capacity at all times instead scarce resources must be distributed to meet the needs of the economy in an ideal way while also limiting the amount of waste produced the ideal state is related to the welfare of the population with peak efficiency also resulting in the highest level of welfare possible based on the resources available one way to measure economic efficiency is based on the unused productive capacity of an economy or system in the united states this is reported in the quarterly survey of plant capacity utilization issued by the census bureau every three months 1efficiency in production allocation and distributionproductive firms seek to maximize their profits by bringing in the most revenue while minimizing costs to do this they choose a combination of inputs that minimizes their costs while producing as much output as possible by doing so they operate efficiently when all firms in the economy do so it is known as productive efficiency consumers likewise seek to maximize their well being by consuming combinations of final consumer goods that produce the highest total satisfaction of their wants and needs at the lowest cost to them the resulting consumer demand guides productive through the laws of supply and demand firms to produce the right quantities of consumer goods in the economy that will provide the highest consumer satisfaction relative to the costs of inputs when economic resources are allocated across different firms and industries each following the principle of productive efficiency in a way that produces the right quantities of final consumer goods this is called allocative efficiency finally because each individual values goods differently and according to the law of diminishing marginal utility the distribution of final consumer goods in an economy is efficient or inefficient distributive efficiency is when the consumer goods in an economy are distributed so that each unit is consumed by the individual who values that unit most highly compared to all other individuals note that this type of efficiency assumes that the amount of value that individuals place on economic goods can be quantified and compared across individuals economic efficiency and welfaremeasuring economic efficiency is often subjective relying on assumptions about the social good or welfare created and how well that serves consumers in this regard welfare relates to the standard of living and relative comfort experienced by people within the economy at peak economic efficiency when the economy is at productive and allocative efficiency the welfare of one cannot be improved without subsequently lowering the welfare of another this point is called pareto efficiency even if pareto efficiency is reached the standard of living of all individuals within the economy may not be equal pareto efficiency does not include issues of fairness or equality among those within a particular economy instead the focus is purely on reaching a point of optimal operation regarding the use of limited or scarce resources it states that efficiency is obtained when a distribution exists where one party s situation cannot be improved without making another party s situation worse 