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Economic Efficiency

The United States has a lot of resources at its disposal. It wants to use them in the best way possible. How does it do this? It divvies up the supply so the maximum number of people are satisfied. This is called economic efficiency.

Explanation

An economy is economically efficient when every resource is optimally allocated to serve each individual. Any action whose benefits exceed the costs moves the economy toward economic efficiency. If there is greater public benefit to building a park than cost, then it moves the economy toward economic efficiency.

Technical Efficiency

In your real life, you aren’t getting as much as you can if you sit idly and waste time. You are wasting the precious resource of time. Now, instead of sitting idly by, you read a book, you are using all of your resources. Maybe that’s not the most productive thing to do, but you’re not wasting time. This is technical efficiency: producing as much as possible from your land, labor, and capital.

Allocative Efficiency

This means whether the government is producing the right kinds of goods and services. Going back to our last example, reading a book instead of studying is technically efficient, but studying is allocatively efficient.

Combining both results in economic efficiency.

GDP