What is Static (Economic) Efficiency?
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Last updated 6 Jan 2023
Static economic efficiency refers to a situation in which it is not possible to improve the allocation of resources in an economy without changing the quantity of resources available.
This means that, given the existing stock of factor resources (factor inputs) such as land, labour, capital and enterprise, the economy is producing the maximum possible output and there is no way to reallocate those resources to produce more of one good without producing less of another good.
In other words, the economy is operating at its production possibility frontier, where it is not possible to produce more of one good without sacrificing the production of another good.
Static efficiency is different from dynamic efficiency, which refers to the use of resources in the most productive and efficient way over time.
Dynamic efficiency takes into account the fact that resources and technology can change over time, and that it is possible to improve the allocation of resources by investing in new technologies and education.
Static economic efficiency is often used as a benchmark to evaluate the performance of an economy, and policies that promote static efficiency are aimed at ensuring that resources are used in the most productive and efficient way possible.
So static efficiency refers to allocative efficiency and productive efficiency
Allocative efficiency refers to the allocation of resources in an economy such that the goods and services produced reflect the preferences and needs of society. This means that the right goods and services are being produced in the right quantities and are being distributed to the people who value them most.
Productive efficiency, on the other hand, refers to the use of the least amount of resources to produce a given quantity of goods and services. This means that the economy is producing goods and services at the lowest possible cost.