Principle #7: Resources Should Be Used Efficiently to Achieve Society’s Goals

Suppose you are taking a course in which the classroom is too small for the number of students—many people are forced to stand or sit on the floor—despite the fact that large, empty classrooms are available nearby. You would say, correctly, that this is no way to run a college. Economists would call this an inefficient use of resources. But if an inefficient use of resources is undesirable, just what does it mean to use resources efficiently?

An economy is efficient if it takes all opportunities to make some people better off without making other people worse off.

You might imagine that the efficient use of resources has something to do with money, maybe that it is measured in dollars-and-cents terms. But in economics, as in life, money is only a means to other ends. The measure that economists really care about is not money but people’s happiness or welfare. Economists say that an economy’s resources are used efficiently when they are used in a way that has fully exploited all opportunities to make everyone better off. To put it another way, an economy is efficient if it takes all opportunities to make some people better off without making other people worse off.

In our classroom example, there clearly was a way to make everyone better off—moving the class to a larger room would make people in the class better off without hurting anyone else in the college. Assigning the course to the smaller classroom was an inefficient use of the college’s resources, whereas assigning the course to the larger classroom would have been an efficient use of the college’s resources.

When an economy is efficient, it is producing the maximum gains from trade possible given the resources available. Why? Because there is no way to rearrange how resources are used in a way that can make everyone better off. When an economy is efficient, one person can be made better off by rearranging how resources are used only by making someone else worse off.

In our classroom example, if all larger classrooms were already occupied, the college would have been run in an efficient way: your class could be made better off by moving to a larger classroom only by making people in the larger classroom worse off by making them move to a smaller classroom.

We can now state our seventh principle:

Resources should be used as efficiently as possible to achieve society’s goals.

Equity means that everyone gets his or her fair share. Since people can disagree about what’s “fair,” equity isn’t as well defined a concept as efficiency.

Should economic policy makers always strive to achieve economic efficiency? Well, not quite, because efficiency is only a means to achieving society’s goals. Sometimes efficiency may conflict with a goal that society has deemed worthwhile to achieve. For example, in most societies, people also care about issues of fairness, or equity. And there is typically a trade-off between equity and efficiency: policies that promote equity often come at a cost of decreased efficiency in the economy, and vice versa.

Sometimes equity trumps efficiency.
Construction Photography/CorbIs

To see this, consider the case of disabled-designated parking spaces in public parking lots. Many people have difficulty walking due to age or disability, so it seems only fair to assign closer parking spaces specifically for their use. You may have noticed, however, that a certain amount of inefficiency is involved. To make sure that there is always a parking space available should a disabled person want one, there are typically more such spaces available than there are disabled people who want one. As a result, desirable parking spaces are unused. (And the temptation for nondisabled people to use them is so great that we must be dissuaded by fear of getting a ticket.)

So, short of hiring parking valets to allocate spaces, there is a conflict between equity, making life “fairer” for disabled people, and efficiency, making sure that all opportunities to make people better off have been fully exploited by never letting close-in parking spaces go unused.

Exactly how far policy makers should go in promoting equity over efficiency is a difficult question that goes to the heart of the political process. As such, it is not a question that economists can answer. What is important for economists, however, is always to seek to use the economy’s resources as efficiently as possible in the pursuit of society’s goals, whatever those goals may be.