The Economic Efficiency

The economic efficiency principle has for long been the guiding principle in decision-making. However, this principle has been clearer in the corporate world and less so in public enterprise.

In Africa, especially before liberalization, management of public institutions was often guided by social and political considerations rather than economic efficiencies. It is also generally agreed by economists that market economies are more economically efficient than other alternatives and that government intervention is only necessary at the micro-economic level through fiscal and monetary policy intervention.

For a more informed and better discussion on economic efficiency, we need first to define the term, “economic efficiency”

Economists have given various definitions of the term “economic efficiency” but all seem to agree that it refers the use of resources so as to maximize the production of goods and services by an enterprise. In the case of a country, we can say that the economic system of a country is more efficient than another if it can produce more goods and services than another country without using more resources.

The same argument is true of companies. One company can be said to be economically efficient if it produces goods and services with less input. When production of goods and services can be made at the lowest possible per-unit cost then we can say that such a company has economic efficiency as its guiding principle.

In essence, economic efficiency indicates how well an organisation, or a government, uses its resources to produce goods and services. In order to achieve this it focuses on resources (inputs), goods and services (outputs), and the rate (productivity) at which inputs are used to produce or deliver the outputs.

“Efficiency” is a relative concept. It is measured by comparing achieved productivity with a desired norm, target, or standard. Output quantity and quality achieved and the level of service provided are also compared to targets or standards to determine to what extent they may have caused changes in efficiency. Efficiency is improved when more outputs of a given quality are produced with the same or fewer resource inputs, or when the same amount of output is produced with fewer resources.

For further clarity, I shall attempt to give a diagrammatic representation of the elements of efficiency and how “economic efficiency” is expected to work in an organisation. Diagram 1, below, will illustrate:

DIAGRAM 1: Main Elements of Efficiency

Efficiency indicates how well an organisation uses its resources