Economic Efficiency

The fresh smell of coffee...the softness of a kitten...the efficiency of the economy. Yes, one of the great joys in life, economic efficiency is when the economy’s social media status says “resources are being used to their maximum potential,” which means minimized waste. What a thing of beauty, eh?

In a more tangible sense, goods and services are produced with minimized costs. When things are being produced as efficiently as possible, it means inputs are fulfilling their largest potential, and workers are being worked to their utmost capacity (which, in reality, is when they’re not over-worked and well-rested, mind you…though it’s up for debate whether the numbers take that into account). Another way to look at it is by looking at the waste, which economists call “loss,” or sometimes “deadweight loss” in its full form, which is when things aren’t efficient.

Economic efficiency, like “economic” anything, takes into account not just explicit costs and benefits (that have $ assigned to them), but also implicit costs and benefits (which don’t have a price put on them...but economists put prices on them anyway, to make things easier). In other words, economic efficiency doesn’t just refer to goods and services that firms make, but also things like the labor market and society.

For instance, discrimination in the labor market can create labor market inefficiency, and a negative externality like pollution can create a social cost, or deadweight loss. Because economists, unlike accountants, take everything into account.

Ironic, isn’t it?