Welfare and Efficiency
There are so many definitions and literatures about economic efficiency. In fact,
even in your foundation subjects in economics you defined efficiency. Generally,
economic efficiency is about a society making optimal use of scarce resource to
help satisfy its varying needs and wants.
In a neoclassical economic paradigm, economic efficiency is the standard in
examining both market outcomes and government interventions. Economic
efficiency considers the following assumptions:
(1) All actions (example: government activities) generating more social
benefits than costs should be pursued.
(2) No actions causing social costs than benefits should be undertaken.
If both assumptions are satisfied, a Pareto Optimal allocation will be attained.
Pareto Optimal allocation is one in which it is impossible to reallocate resources
in such a way to make at least one person better off without harming another
person.
Now let as examine the economy, when market exchange occurs – that is, the
typical exchange of goods and services transactions – it is clear that both parties
(consumer and producer) have been better off. The consumer gets the goods
or service he/she needs. While the producer gets paid for the goods or service
he/she provides.
However, it is not the case for government actions. When the government
makes policies, programs, projects and activities it is frequently the case that
“some” parties have been made better off while others have been made worse
off.
If all the parties in the market exchange benefits, it is clear that the action
is consistent with efficiency. Meanwhile for government actions where some
benefits and other are harmed, then the efficiency implications are not so
obvious.
To give you an example of the government actions, look at Figure 1. The
government is imposing a Road Widening Project. This is to improve the
accessibility and logistics in the area. The improvement of the road will cause a
change in the economy.
