Question from Past Microeconomics Qualifying Exam[]
Spring 2006 - Section I, Question ten, George Mason University
Technical efficiency and economic efficiency are essentially one and the same.
Answer[]
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?"
Alternative Answer:
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.
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