<p>They mean that the resulting distribution is Pareto optimal, i.e., there is no reallocation which would make every individual weakly better off and at least one strictly better off.</p>

CC BY-SA 4.0
2024-09-21T15:38:22.273Z
This makes no sense. 

Aren't all economic systems Pareto optimal then?
anonymous_inquirer
CC BY-SA 4.0
2024-09-23T01:40:58.930Z
@anonymous_inquirer, No, e.g. a monopoly ist not Pareto optimal.
VARulle
CC BY-SA 4.0
2024-09-24T04:22:11.387Z
Suppose that I am a kleptocratic billionaire who is hoarding all of the resources. There is no reallocation which would make everyone better off without reducing my consumption significantly.
anonymous_inquirer
CC BY-SA 4.0
2024-09-24T09:14:47.987Z
@anonymous_inquirer, That's true. In Micro 101 speak, the contract curve in the Edgeworth box always connects the diagonal corners. Pareto optimal doesn't mean just, equal, or fair.
VARulle
CC BY-SA 4.0
2024-09-21T15:22:50.620Z
2024-09-21T15:22:50.620Z
VARulle
<p>Depending on exact subfield or problem there can be actually multiple concepts of efficiency.</p>
<ol>
<li>Pareto Efficiency: there is no reallocation which would make every individual weakly better off and at least one strictly better off. As already described by VAR rule.</li>
<li>Allocative Efficiency, which often but not always coincides with Pareto efficiency, which is typically defined in terms of marginal benefit being equal to marginal costs <span class="math-container">$MB=MC$</span>, or allocative efficiency is sometimes defined in terms of maximizing Marshallian welfare, or just 'vanilla' sum of utilities.</li>
<li>Productive Efficiency; when economy is producing at the production possibility frontier.</li>
</ol>
<p>Sometimes all three coincide but they are not necessarily equal to each other.</p>
<p>Some less common concepts of efficiency are;</p>
<ul>
<li>Market efficiency in financial economics; in finance market efficiency is shorthand for informational efficiency and does not imply any other efficiency.</li>
<li>X- Efficiency; a level of efficiency that can be attained once we allow for not completely rational behavior or market imperfections (<a href="https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_1888-2" rel="nofollow noreferrer">Leibenstein, 2008</a>)</li>
</ul>
<p>PS; nobody claims that non-market mechanism cannot be Pareto efficient or efficient using some of the other concepts of efficiency.</p>
<p>PPS; In USSR not everyone was given housing by the state. You should not argue from false premises. In USSR, it was illegal to be homeless and people who were homeless were criminally punished and did not just get free housing from the government. Moreover, people who were viewed as undesirables (e.g. petty criminals, homosexuals, political dissidents) by the state also not only did not received house from state but often state forced them out of the house where they lived by refusing to give them residence permit at any address or canceled their previous residence permit (<a href="https://books.google.nl/books?hl=en&amp;lr=&amp;id=k_utDwAAQBAJ&amp;oi=fnd&amp;pg=PR5&amp;dq=Needed+by+Nobody:+Homelessness+and+Humanness+in+Post-Socialist+Russia.+Culture+and+Society+after+Socialism+by+Tova+H%C3%B6jdestrand" rel="nofollow noreferrer">Höjdestrand, 2003</a>).</p>

CC BY-SA 4.0
2024-09-21T16:00:27.807Z
2024-09-21T16:53:19.397Z
2024-09-21T16:53:19.397Z
1muflon1
<p>As a former USSR resident, I just want to comment the part that USSR was supposedly &quot;pareto efficient&quot; in housing. This is not true.</p>
<p>Housing was in enormous shortage, and people lived in communal apartments: a single bedroom and kitchen/bathroom shared with 4-5 other families. Housing was allocated on a per family basis, and individuals did not have their own housing.</p>
<p>Housing was prioritized for the needs of the USSR State: housing was provided by the employer (factory) and dependent on social herarchy.</p>
<p>Nuclear scientists and rocket engineers would get good housing, because the state had a high priority on building tanks and thermonuclear missiles for a potential war against the USA.</p>
<p>Everybody else, however, was deprioritized and had whatever dire housing was left (<a href="https://kommunalka.colgate.edu/cfm/essays.cfm?ClipID=376" rel="nofollow noreferrer">https://kommunalka.colgate.edu/cfm/essays.cfm?ClipID=376</a>).</p>
<p>Essentially nobody who has ever lived in the USSR thinks that was efficient and wants to go back to those times.</p>

CC BY-SA 4.0
2024-09-25T22:07:55.313Z
Hi, while your post has valid comments on SE, answer should also try to answer question (see our rules in the help center). Otherwise, you should leave comment(s). I think if you would add answer about efficiency and keep this as PS or correction of example OP uses it would be fine, but as it is without any edits this should probably be a converted to the comment.
1muflon1
CC BY-SA 4.0
2024-09-25T02:20:12.520Z
2024-09-25T02:23:01.793Z
2024-09-25T02:23:01.793Z
slt_omz
<p>In science, efficiency has a very clear definition: output/input. I still don't understand what allocative efficiency actually means in economic terms.</p>
<p>It clearly doesn't mean minimizing waste, since waste is a massive issue in capitalist economies. For example, we have Amazon destroying unsold surplus products because that is more profitable than giving them away or selling them at a low price. Almost a third of all the food produced in the US is wasted.</p>
<p>One definition I've heard offered is &quot;Pareto efficiency&quot;, but this doesn't make any sense either.</p>
<p>A non-market system can easily be &quot;Pareto efficient&quot;. In the USSR, where everyone was given state housing, it was impossible to give a person another apartment for example without taking that apartment away from someone else.</p>

<microeconomics><pareto-efficiency><efficient-markets>
When economists say that markets are "efficient" at distributing resources, what *exactly* do they mean?
anonymous_inquirer
# When economists say that markets are "efficient" at distributing resources, what *exactly* do they mean?

(Asked by: username_0 on 2024-09-21)

In science, efficiency has a very clear definition: output/input. I still don't understand what allocative efficiency actually means in economic terms.

It clearly doesn't mean minimizing waste, since waste is a massive issue in capitalist economies. For example, we have Amazon destroying unsold surplus products because that is more profitable than giving them away or selling them at a low price. Almost a third of all the food produced in the US is wasted.

One definition I've heard offered is "Pareto efficiency", but this doesn't make any sense either.

A non-market system can easily be "Pareto efficient". In the USSR, where everyone was given state housing, it was impossible to give a person another apartment for example without taking that apartment away from someone else.

**Tags:** microeconomics, pareto-efficiency, efficient-markets

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## 3 answers

### Answer by username_1 on 2024-09-21. Score: 3

They mean that the resulting distribution is Pareto optimal, i.e., there is no reallocation which would make every individual weakly better off and at least one strictly better off.

> **Comments:**
> **username_0**: This makes no sense.   Aren't all economic systems Pareto optimal then?  
> **username_1**: @anonymous_inquirer, No, e.g. a monopoly ist not Pareto optimal.  
> **username_0**: Suppose that I am a kleptocratic billionaire who is hoarding all of the resources. There is no reallocation which would make everyone better off without reducing my consumption significantly.  
> **username_1**: @anonymous_inquirer, That's true. In Micro 101 speak, the contract curve in the Edgeworth box always connects the diagonal corners. Pareto optimal doesn't mean just, equal, or fair.  

---

### Answer by username_2 on 2024-09-21. Score: 1

Depending on exact subfield or problem there can be actually multiple concepts of efficiency.

1. Pareto Efficiency: there is no reallocation which would make every individual weakly better off and at least one strictly better off. As already described by VAR rule.
2. Allocative Efficiency, which often but not always coincides with Pareto efficiency, which is typically defined in terms of marginal benefit being equal to marginal costs $MB=MC$, or allocative efficiency is sometimes defined in terms of maximizing Marshallian welfare, or just 'vanilla' sum of utilities.
3. Productive Efficiency; when economy is producing at the production possibility frontier.

Sometimes all three coincide but they are not necessarily equal to each other.

Some less common concepts of efficiency are;

* Market efficiency in financial economics; in finance market efficiency is shorthand for informational efficiency and does not imply any other efficiency.
* X- Efficiency; a level of efficiency that can be attained once we allow for not completely rational behavior or market imperfections ([Leibenstein, 2008](https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_1888-2))

PS; nobody claims that non-market mechanism cannot be Pareto efficient or efficient using some of the other concepts of efficiency.

PPS; In USSR not everyone was given housing by the state. You should not argue from false premises. In USSR, it was illegal to be homeless and people who were homeless were criminally punished and did not just get free housing from the government. Moreover, people who were viewed as undesirables (e.g. petty criminals, homosexuals, political dissidents) by the state also not only did not received house from state but often state forced them out of the house where they lived by refusing to give them residence permit at any address or canceled their previous residence permit ([Höjdestrand, 2003](https://books.google.nl/books?hl=en&lr=&id=k_utDwAAQBAJ&oi=fnd&pg=PR5&dq=Needed+by+Nobody:+Homelessness+and+Humanness+in+Post-Socialist+Russia.+Culture+and+Society+after+Socialism+by+Tova+H%C3%B6jdestrand)).


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### Answer by username_3 on 2024-09-25. Score: 0

As a former USSR resident, I just want to comment the part that USSR was supposedly "pareto efficient" in housing. This is not true.

Housing was in enormous shortage, and people lived in communal apartments: a single bedroom and kitchen/bathroom shared with 4-5 other families. Housing was allocated on a per family basis, and individuals did not have their own housing.

Housing was prioritized for the needs of the USSR State: housing was provided by the employer (factory) and dependent on social herarchy.

Nuclear scientists and rocket engineers would get good housing, because the state had a high priority on building tanks and thermonuclear missiles for a potential war against the USA.

Everybody else, however, was deprioritized and had whatever dire housing was left (<https://kommunalka.colgate.edu/cfm/essays.cfm?ClipID=376>).

Essentially nobody who has ever lived in the USSR thinks that was efficient and wants to go back to those times.

> **Comments:**
> **username_2**: Hi, while your post has valid comments on SE, answer should also try to answer question (see our rules in the help center). Otherwise, you should leave comment(s). I think if you would add answer about efficiency and keep this as PS or correction of example OP uses it would be fine, but as it is without any edits this should probably be a converted to the comment.  

---

