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Economic Efficiency:

"A broad term that implies an economic state in which every resource is optimally allocated to serve each person in the best way while minimizing waste and inefficiency. "

And here's the part I don't understand:

"When an economy is economically efficient, any changes made to assist one person would harm another."

Can someone please unpack that last part for me? I'm not sure I understand it.

leeand00
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Suppose the economy is in a state where one person could be made better off without making anyone worse off. Most people would agree this is not a good state to be in, i.e. we can do better. That means a "pareto improvement" is possible.

So what we would want is to in fact make that person better off (as no one else gets harmed and one person benefits). In trying to improve upon that state, we change it. We keep doing this until it is no longer possible to make anyone better off without making someone worse off. I.e. we stop improving when it's no longer possible to improve.

So a state where pareto improvements are possible is not efficient since we can do better. Hence, states where no pareto improvements are possible (we can't do better) are the best possible ones. The best possible states are called efficient.

Hence, efficiency means a pareto improvement is no longer possible. In other words: it is not possible to make someome better off without making someone else worse off.

BB King
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    Plain and simple. Very good ! – Alexis L. May 27 '16 at 12:44
  • @BBKing But why would we want to make someone better off at the expense of making someone worse off? Why is that better than making someone better off without making anyone worse off? I don't understand that... – leeand00 May 27 '16 at 15:56
  • We don't want to, that's exactly the point. We do want to make people better off, if no one else gets harmed though. We are being efficient if there is nothing better we can do, i.e. if our only option left to make someone better off is to make someone worse off, which we don't want. If we could make someone better off without making anyone worse off, then it wouldn't be an efficient state, because we could do that and improve (so what we're doing now is worse than an alternative: Make someone better off without making anyone worse off). If you can improve upon outcomes, you're not efficient. – BB King May 27 '16 at 18:16
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My advice would to be to keep clearly separate the very specific concept of "Pareto efficiency" (which is presented in @BB King's answer and which is implied by the passage the OP quoted), with the more general term "economic efficiency", or just "efficiency".

"Pareto efficiency" is a tricky concept and criterion. The concept essentially formalizes the "limits of Economics": once an economic system reaches a point where "one man's gain" can only be "another man's loss", then any further action will have to be based either on value judgements or on the balance of socieconomic power. Economics may analyze these phenomena, but it cannot prescribe further actions under a universally acceptable criterion.

The general term "efficiency" on the other hand is used in various places in the Economics literature to essentially refer to "not wasting resources", to "using resources as efficiently as possible", i.e. in a more narrow sense, usually focused on production. This is a less ambitious, pragmatic route for economics: leave distributional matters aside, focus on maximizing production and then, it is society's burden to allocate this maximized production between its members (when Economics analyzes "inequality and growth", it examines whether inequality hurts growth and production, and not whether it is "good/bad" from an ethical or philosophical point of view).

There is a whole related subfield in Economics, with an applied focus but based on rigorous theoretical and mathematical analysis, which deals exclusively with the matter, Efficiency Analysis, which has two main branches, Stochastic Frontier Analysis (SFA), and Data Envelopment Analysis (DEA). Here, we care about whether the productive mechanisms of society "use the resources efficiently", where we look at the matter from different complementary aspects: for example,

Given the available technology, do firms produce the maximum possible output? ("Technical" efficiency)

Given technology and factor prices, do firms employ the optimal resource mix? ("Allocative" efficiency)

etc, see for example

Fried, H. O., Lovell, C. K., & Schmidt, S. S. (Eds.). (2008). The measurement of productive efficiency and productivity growth. Oxford University Press.

Alecos Papadopoulos
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  • The point where "one man's gain" can only be "another man's loss"...so like a monopoly? – leeand00 May 27 '16 at 18:12
  • Note that OP's question is about the statement: "When an economy is economically efficient, any changes made to assist one person would harm another", which is directly related to pareto efficiency. – BB King May 27 '16 at 18:13
  • @leeand00 Market structure does not enter the definition of Pareto Efficiency. – Alecos Papadopoulos May 27 '16 at 18:13
  • @AlecosPapadopoulos so that's referring more to world domination? scratches head – leeand00 May 27 '16 at 18:14
  • @BBKing It is the first thing I write in my answer. But since the passage quoted by the OP does not use the term "Pareto efficiency" but "Economic" efficiency, my answer serves to alert the OP to the fact that any time he reads "economic efficiency", he should not take it to mean "Pareto efficiency". – Alecos Papadopoulos May 27 '16 at 18:15
  • @leeand00 I am also scratching my head, because I cannot understand what "world domination" has to do with the concept we are discussing either. – Alecos Papadopoulos May 27 '16 at 18:17
  • @AlecosPapadopoulos If one man's gain can only be another man's loss outside the scope of a market...that would mean that one man would eventually own everything...right? – leeand00 May 27 '16 at 18:20
  • @AlecosPapadopoulos Sorry I'm just trying to understand...Markets would separate at least some of the gain men from the other ones. – leeand00 May 27 '16 at 18:26
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    @leeand00 I am afraid I have confused you with this expression. "One man's gain is another man's loss" is the proverbial expression to describe a "zero-sum game": In order to increase your material well being, mine has to be decreased. This is a static assessment, we don't actually take all wealth and give it to one person. We just conclude/realize that we have reached a point where if we want to increase even by a little the wealth of somebody, we have to decrease the wealth of somebody else. This may sound self-evident but it is not, especially if we consider economies with production. – Alecos Papadopoulos May 27 '16 at 20:11