Overview: Efficiency

StartTable of ContentsIndex

Reading Selections:

On The Internet:

Alternatives and Supplements

Optional Sections
Who's Who




A central question in economics is the relationship between an individual's interests and the interests of the group. Under some circumstances, there is conflict; under others, there is harmony between self-interest and group interest. We can see this relationship in the story of the prisoners' dilemma, but a more sophisticated examination of it requires the analytical tools of microeconomics. Once one understands the economic theory of consumer behavior and the theory of the firm, one can come back to the invisible-hand question--the question of whether individual action serves the good of the group--using the concept of economic efficiency. Examining the concept of economic efficiency is the purpose of this group of readings.

A prime purpose of microeconomics is to ask what sort of economic system, if any, brings harmony rather than conflict between the individual and the group. For economists, the concept of economic efficiency is a key to discussing this question.

After you complete this unit, you should be able to:

  • Define economic efficiency, Pareto optimality, welfare loss.
  • Explain the three situations that allow an increase in economic efficiency.
  • List at least two assumptions needed before one can take economic efficiency seriously as a normative criterion.
Copyright Robert Schenk