What is an economic efficiency? How can it be measured?

Economic efficiency is a state in which an economy's scarce resources are allocated and used optimally, so that the maximum possible benefit is obtained from them; in a market it is achieved when the marginal benefit of consumption equals the marginal cost of production (MB = MC).

The two forms of economic efficiency:

1. Productive efficiency: output is produced at the minimum average cost (P = AC minimum), so no resources are wasted in the production process.
2. Allocative efficiency: price equals marginal cost (P = MC), so resources are used to produce exactly the goods, in the amounts, that society values.

How it is measured:

1. Consumer's surplus: the gap between what consumers are willing to pay and what they actually pay — graphically the area below the demand curve and above the price line; a larger consumer surplus signals greater benefit to buyers.
2. Producer's surplus: the gap between the price producers receive and the lowest price they would accept — graphically the area above the supply curve and below the price line; it signals the benefit to sellers.
3. Total surplus: the sum of consumer surplus and producer surplus (TS = CS + PS), which measures the overall welfare society gains; efficiency is highest where total surplus is maximised.
4. The MB = MC test: the market is efficient at the output where marginal benefit equals marginal cost, which coincides with the point of maximum total surplus at competitive equilibrium.

Thus, economic efficiency is judged by whether resources reach the P = MC and minimum-AC conditions, and it is measured in practice through consumer surplus, producer surplus and their sum, total surplus.