Question from Past Microeconomics Qualifying ExamEdit
Spring 2006 - Section I, Question ten, George Mason University
Technical efficiency and economic efficiency are essentially one and the same.
False. Technical efficiency refers to using natural resources without waste. Economic efficiency refers to maximizing utility in consumption with the given resources. In a sense, technical efficiency can be seen as a prerequisite for economic efficiency.
Then again, a student in the back row may raise his hand and say: "but aren't these the same thing?"
Uncertain. Economic efficiency usually refers to pareto efficiency or Kaldor-Hicks efficiency. A situation is pareto efficient if no one can be made better off without making anyone else worse off. A situation is Kaldor-Hicks efficient if the outcome is a social optimum, i.e. resources are allocated in the most efficient way. Technical efficiency refers to the resource (energy) efficieny of a production process. Increasing technical efficiency of a production process usually leads to a decrease in production cost and can therefore be considered Kaldor-Hicks efficient. It is not necessarily pareto efficient however.