{"id":366,"date":"2016-08-27T20:20:46","date_gmt":"2016-08-28T00:20:46","guid":{"rendered":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/?post_type=chapter&#038;p=366"},"modified":"2017-05-14T22:44:33","modified_gmt":"2017-05-15T02:44:33","slug":"2-1-economic-efficiency","status":"web-only","type":"chapter","link":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/chapter\/2-1-economic-efficiency\/","title":{"raw":"2.1 Economic Efficiency","rendered":"2.1 Economic Efficiency"},"content":{"raw":"<div class=\"bcc-box bcc-highlight\">\r\n<h3 itemprop=\"educationalUse\">Learning Objectives<\/h3>\r\nBy the end of this section, you will be able to:\r\n<ul>\r\n \t<li>Define efficiency and understand its usefulness as a normative criterion<\/li>\r\n \t<li>Explain Pareto\u00a0Improvements<\/li>\r\n<\/ul>\r\n<\/div>\r\nBritish politician and author Benjamin Disraeli once wrote: \u201cThere can be economy only when there is\u00a0efficiency.\u201d While this statement is most\u00a0definitely\u00a0an\u00a0exaggeration, efficiency is a very important concept in economics.\r\n\r\nIn the introduction, we explored the need to develop a normative criterion for the evaluation of subjective questions. In economics, one of the most important normative criteria is efficiency. Efficiency, economic efficiency, and Pareto efficiency are essentially synonymous:\r\n\r\n<em>if we are in a position such that a person <strong>cannot<\/strong>\u00a0be made better off without making someone else worse off, then this position is <strong>efficient.<\/strong><\/em>\r\n\r\nAn exchange at this point would be inefficient.\r\n\r\n<strong><em>\u00a0<\/em><\/strong>For example, if you have a bag of your favourite candies, and a friend asks for one, as long as you feel as though you are losing something by giving him one, the exchange is inefficient \u2013 even if his increase in happiness\u00a0means only a slight drop in yours. (Note that if giving him a candy makes you happier despite losing a candy, it could be efficient to exchange)\r\n\r\nThis is noticeably different than <strong>equitable, <\/strong>where resources are distributed in a fair manner. It follows that:\r\n\r\n<em>if we are in a position such that a person <strong>can<\/strong>\u00a0be made better off without making someone else worse off, then this position is <strong>inefficient.<\/strong><\/em>\r\n\r\n<span>An exchange at this point would be efficient.<\/span>\r\n\r\nFor example, if you accidentally purchase a\u00a0\u00adpair of shoes that do not fit you but fit your friend, and your friend buys the same pair of shoes\u00a0that do not fit her but fit you\u00a0\u2013 you would both be made better\u00a0off by trading shoes. This would be an efficient trade.\u00a0 The position you were in was inefficient.\r\n\r\n<strong>An efficient\u00a0exchange\u00a0<\/strong>occurs when changes can be made that will:\r\n<ol>\r\n \t<li>Make someone better off, while<\/li>\r\n \t<li>Not making anyone worse off<\/li>\r\n<\/ol>\r\nThese \u201cwin-win\u201d opportunities\u00a0happen to be quite rare, as they are usually acted upon. Such win-win\u2019s also have a special classification:\u00a0<strong>A\u00a0Pareto\u00a0Improvement.\u00a0<\/strong>It is difficult to find a perfect example of a Pareto improvement, as most actions harm at least one party. Using this terminology, we can determine that:\r\n<ul>\r\n \t<li>A situation is\u00a0<strong>efficient\u00a0<\/strong>if there are\u00a0<strong>no\u00a0<\/strong>Pareto Improvements<\/li>\r\n \t<li>A situation is\u00a0<strong>in<\/strong>efficient if there\u00a0<strong>are\u00a0<\/strong>Pareto Improvements<\/li>\r\n<\/ul>\r\nIn a situation where there is an opportunity for a Pareto Improvement, the opportunity should be taken advantage of. A major limitation of this metric is that it gives us no direction on the desirability of changes that make some people better off while making others worse off other than to say they are inefficient.\r\n\r\nThis limitation is important. To further develop this idea, we must follow the path of Vilfredo Pareto.\r\n<div class=\"textbox key-takeaways\">\r\n<h3 itemprop=\"educationalUse\">Economic History<\/h3>\r\n[caption id=\"attachment_1964\" align=\"alignleft\" width=\"221\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Vilfredo_Pareto-2.jpg\" alt=\"\" width=\"221\" height=\"309\" class=\"wp-image-1964 size-full\" \/> (Credit: Wikimedia Commons)[\/caption]\r\n<h2>Vilfredo Parato<\/h2>\r\nThe term Pareto Improvement is derived from the concept of Pareto Optimality and is specific to the optimal distribution of goods within a system.. The concept was developed by Italian economist Vilfredo Federico Damaso Pareto (1848 \u2013 1923). At the age of 21, Pareto received a doctorate in engineering from the precursor to the Polytechnic University of Turin. His engineering background shaped the way he expressed economic theory by relying on graphs, maps, and statistical analysis to prove his hypotheses.\r\n\r\nOver the years, Pareto became more disenfranchised from the Italian government, who he criticized for poorly handling labor strikes and social reforms. He believed democracy was fundamentally unsustainable and that a power elite would always rise and dominate the lower class. This interest in power laws and income distribution engaged him in political change. As it happens, Mussolini, the Italian dictator who would dominate Italian politics for many years, was inspired by Pareto\u2019s ideas.\r\n\r\nIn economics, Pareto is best known for the concept of Pareto-optimal allocation of resources, and his law of income distribution. He also did work in consumer theory to show the utility of goods need not be measured to\u00a0derive results.\r\n\r\n<\/div>\r\n<div class=\"textbox\">\r\n<h2>Glossary<\/h2>\r\n<dl class=\"definition\">\r\n \t<dt><\/dt>\r\n \t<dt><\/dt>\r\n \t<dt><strong>Efficient<\/strong><\/dt>\r\n \t<dd id=\"fs-idm10827520\">A position such that a person cannot\u00a0be made better off without making someone else worse off.<\/dd>\r\n<\/dl>\r\n<dl id=\"fs-id1166931932929\" class=\"definition\">\r\n \t<dt><b>Equitable<\/b><\/dt>\r\n \t<dd id=\"fs-id8773128\">A solution that is ethically or legally just and fair, but may not be wholly satisfactory to any or all the involved parties.<\/dd>\r\n<\/dl>\r\n<dl id=\"fs-idp75697120\" class=\"definition\">\r\n \t<dd><\/dd>\r\n \t<dt><strong>Inefficient<\/strong><\/dt>\r\n \t<dd id=\"fs-idm10827520\">A position in such that a person can<strong>\u00a0<\/strong>make at least one person better off without making someone worse off.<\/dd>\r\n<\/dl>\r\n<dl id=\"fs-idp107951680\" class=\"definition\">\r\n \t<dt><strong>Parato Improvement<\/strong><\/dt>\r\n \t<dd id=\"fs-idp185853264\"><span>An action done in an economy that harms no one and helps at least one person.<\/span><\/dd>\r\n<\/dl>\r\n<\/div>","rendered":"<div class=\"bcc-box bcc-highlight\">\n<h3 itemprop=\"educationalUse\">Learning Objectives<\/h3>\n<p>By the end of this section, you will be able to:<\/p>\n<ul>\n<li>Define efficiency and understand its usefulness as a normative criterion<\/li>\n<li>Explain Pareto\u00a0Improvements<\/li>\n<\/ul>\n<\/div>\n<p>British politician and author Benjamin Disraeli once wrote: \u201cThere can be economy only when there is\u00a0efficiency.\u201d While this statement is most\u00a0definitely\u00a0an\u00a0exaggeration, efficiency is a very important concept in economics.<\/p>\n<p>In the introduction, we explored the need to develop a normative criterion for the evaluation of subjective questions. In economics, one of the most important normative criteria is efficiency. Efficiency, economic efficiency, and Pareto efficiency are essentially synonymous:<\/p>\n<p><em>if we are in a position such that a person <strong>cannot<\/strong>\u00a0be made better off without making someone else worse off, then this position is <strong>efficient.<\/strong><\/em><\/p>\n<p>An exchange at this point would be inefficient.<\/p>\n<p><strong><em>\u00a0<\/em><\/strong>For example, if you have a bag of your favourite candies, and a friend asks for one, as long as you feel as though you are losing something by giving him one, the exchange is inefficient \u2013 even if his increase in happiness\u00a0means only a slight drop in yours. (Note that if giving him a candy makes you happier despite losing a candy, it could be efficient to exchange)<\/p>\n<p>This is noticeably different than <strong>equitable, <\/strong>where resources are distributed in a fair manner. It follows that:<\/p>\n<p><em>if we are in a position such that a person <strong>can<\/strong>\u00a0be made better off without making someone else worse off, then this position is <strong>inefficient.<\/strong><\/em><\/p>\n<p><span>An exchange at this point would be efficient.<\/span><\/p>\n<p>For example, if you accidentally purchase a\u00a0\u00adpair of shoes that do not fit you but fit your friend, and your friend buys the same pair of shoes\u00a0that do not fit her but fit you\u00a0\u2013 you would both be made better\u00a0off by trading shoes. This would be an efficient trade.\u00a0 The position you were in was inefficient.<\/p>\n<p><strong>An efficient\u00a0exchange\u00a0<\/strong>occurs when changes can be made that will:<\/p>\n<ol>\n<li>Make someone better off, while<\/li>\n<li>Not making anyone worse off<\/li>\n<\/ol>\n<p>These \u201cwin-win\u201d opportunities\u00a0happen to be quite rare, as they are usually acted upon. Such win-win\u2019s also have a special classification:\u00a0<strong>A\u00a0Pareto\u00a0Improvement.\u00a0<\/strong>It is difficult to find a perfect example of a Pareto improvement, as most actions harm at least one party. Using this terminology, we can determine that:<\/p>\n<ul>\n<li>A situation is\u00a0<strong>efficient\u00a0<\/strong>if there are\u00a0<strong>no\u00a0<\/strong>Pareto Improvements<\/li>\n<li>A situation is\u00a0<strong>in<\/strong>efficient if there\u00a0<strong>are\u00a0<\/strong>Pareto Improvements<\/li>\n<\/ul>\n<p>In a situation where there is an opportunity for a Pareto Improvement, the opportunity should be taken advantage of. A major limitation of this metric is that it gives us no direction on the desirability of changes that make some people better off while making others worse off other than to say they are inefficient.<\/p>\n<p>This limitation is important. To further develop this idea, we must follow the path of Vilfredo Pareto.<\/p>\n<div class=\"textbox key-takeaways\">\n<h3 itemprop=\"educationalUse\">Economic History<\/h3>\n<figure id=\"attachment_1964\" aria-describedby=\"caption-attachment-1964\" style=\"width: 221px\" class=\"wp-caption alignleft\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Vilfredo_Pareto-2.jpg\" alt=\"\" width=\"221\" height=\"309\" class=\"wp-image-1964 size-full\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Vilfredo_Pareto-2.jpg 221w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Vilfredo_Pareto-2-215x300.jpg 215w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Vilfredo_Pareto-2-65x91.jpg 65w\" sizes=\"auto, (max-width: 221px) 100vw, 221px\" \/><figcaption id=\"caption-attachment-1964\" class=\"wp-caption-text\">(Credit: Wikimedia Commons)<\/figcaption><\/figure>\n<h2>Vilfredo Parato<\/h2>\n<p>The term Pareto Improvement is derived from the concept of Pareto Optimality and is specific to the optimal distribution of goods within a system.. The concept was developed by Italian economist Vilfredo Federico Damaso Pareto (1848 \u2013 1923). At the age of 21, Pareto received a doctorate in engineering from the precursor to the Polytechnic University of Turin. His engineering background shaped the way he expressed economic theory by relying on graphs, maps, and statistical analysis to prove his hypotheses.<\/p>\n<p>Over the years, Pareto became more disenfranchised from the Italian government, who he criticized for poorly handling labor strikes and social reforms. He believed democracy was fundamentally unsustainable and that a power elite would always rise and dominate the lower class. This interest in power laws and income distribution engaged him in political change. As it happens, Mussolini, the Italian dictator who would dominate Italian politics for many years, was inspired by Pareto\u2019s ideas.<\/p>\n<p>In economics, Pareto is best known for the concept of Pareto-optimal allocation of resources, and his law of income distribution. He also did work in consumer theory to show the utility of goods need not be measured to\u00a0derive results.<\/p>\n<\/div>\n<div class=\"textbox\">\n<h2>Glossary<\/h2>\n<dl class=\"definition\">\n<dt><\/dt>\n<dt><\/dt>\n<dt><strong>Efficient<\/strong><\/dt>\n<dd id=\"fs-idm10827520\">A position such that a person cannot\u00a0be made better off without making someone else worse off.<\/dd>\n<\/dl>\n<dl id=\"fs-id1166931932929\" class=\"definition\">\n<dt><b>Equitable<\/b><\/dt>\n<dd id=\"fs-id8773128\">A solution that is ethically or legally just and fair, but may not be wholly satisfactory to any or all the involved parties.<\/dd>\n<\/dl>\n<dl id=\"fs-idp75697120\" class=\"definition\">\n<dd><\/dd>\n<dt><strong>Inefficient<\/strong><\/dt>\n<dd id=\"fs-idm10827520\">A position in such that a person can<strong>\u00a0<\/strong>make at least one person better off without making someone worse off.<\/dd>\n<\/dl>\n<dl id=\"fs-idp107951680\" class=\"definition\">\n<dt><strong>Parato Improvement<\/strong><\/dt>\n<dd id=\"fs-idp185853264\"><span>An action done in an economy that harms no one and helps at least one person.<\/span><\/dd>\n<\/dl>\n<\/div>\n","protected":false},"author":58,"menu_order":2,"comment_status":"closed","ping_status":"closed","template":"","meta":{"pb_show_title":"","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-366","chapter","type-chapter","status-web-only","hentry"],"part":25,"_links":{"self":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/366","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/users\/58"}],"replies":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/comments?post=366"}],"version-history":[{"count":19,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/366\/revisions"}],"predecessor-version":[{"id":2107,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/366\/revisions\/2107"}],"part":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/parts\/25"}],"metadata":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/366\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/media?parent=366"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapter-type?post=366"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/contributor?post=366"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/license?post=366"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}