Inefficiency
Encyclopedia
The term inefficiency has several meanings depending on the context in which its used:
Productive inefficiency, Resource-market inefficiency and X-inefficiency might be analyzed using Data Envelopment Analysis
and similar methods.
- Algorithmic inefficiencyAlgorithmic efficiencyIn computer science, efficiency is used to describe properties of an algorithm relating to how much of various types of resources it consumes. Algorithmic efficiency can be thought of as analogous to engineering productivity for a repeating or continuous process, where the goal is to reduce...
- refers to less than optimum computer programComputer programA computer program is a sequence of instructions written to perform a specified task with a computer. A computer requires programs to function, typically executing the program's instructions in a central processor. The program has an executable form that the computer can use directly to execute...
s that might exhibit one of more of the symptoms of:- slow execution
- excessive resource consumption (computer memoryComputer memoryIn computing, memory refers to the physical devices used to store programs or data on a temporary or permanent basis for use in a computer or other digital electronic device. The term primary memory is used for the information in physical systems which are fast In computing, memory refers to the...
, instruction path lengthInstruction path lengthIn computer performance, the instruction path length is the number of machine code instructions required to execute a section of a computer program. The total path length for the entire program could be deemed a measure of the algorithm's performance on a particular computer hardware...
, auxiliary storage, power consumption)
- Allocative inefficiencyAllocative efficiencyAllocative efficiency is a theoretical measure of the benefit or utility derived from a proposed or actual selection in the allocation or allotment of resources....
- Allocative efficiency theory says that the distribution of resources between alternatives does not fit with consumer taste (perceptions of costs and benefits). For example, a company may have the lowest costs in "productive" terms, but the result may be inefficient in allocative terms because the "true" or social costSocial costSocial cost, in economics, is generally defined in opposition to "private cost". In economics, theorists model individual decision-making as measurement of costs and benefits...
exceeds the price that consumers are willing to pay for an extra unit of the product. This is true, for example, if the firm produces pollution (see also external cost). Consumers would prefer that the firm and its competitors produce less of the product and charge a higher price, to internalize the external cost.
- Distributive InefficiencyDistributive efficiencyIn welfare economics, distributive efficiency occurs when goods and services are received by those who have the greatest need for them. Abba Lerner first proposed the idea of distributive efficiency in his 1944 book The Economics of Control....
- refers to the inefficient distribution of income and wealth within a society. Decreasing marginal utilitiesMarginal utilityIn economics, the marginal utility of a good or service is the utility gained from an increase in the consumption of that good or service...
of wealth suggests that more egalitarian distributions of wealth are more efficient than unegalitarian distributions. Distributive inefficiency is often associated with economic inequalityEconomic inequalityEconomic inequality comprises all disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. The issue of economic inequality is related to the ideas of...
.
- Economic inefficiency - refers to a situation where "we could be doing a better job," i.e., attaining our goals at lower cost. It is the opposite of economic efficiency. In the latter case, there is no way to do a better job, given the available resources and technology.
- Keynesian inefficiency - might be defined as incomplete use of resources (labor, capital goods, natural resources, etc.) because of inadequate aggregate demandAggregate demandIn macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...
. We are not attaining potential outputPotential outputIn economics, potential output refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. The existence of a limit is due to natural and institutional constraints...
, while suffering from cyclical unemployment. We could do a better job if we applied deficit spendingDeficit spendingDeficit spending is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time, also called simply "deficit," or "budget deficit," the opposite of budget surplus....
or expansive monetary policyMonetary policyMonetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
.
- Pareto inefficiencyPareto efficiencyPareto efficiency, or Pareto optimality, is a concept in economics with applications in engineering and social sciences. The term is named after Vilfredo Pareto, an Italian economist who used the concept in his studies of economic efficiency and income distribution.Given an initial allocation of...
- Pareto efficiency theory says that one person could be made better off without making anyone else worse off. In practice, this criterion is difficult to apply in a constantly-changing world, so many emphasize Kaldor-Hicks efficiencyKaldor-Hicks efficiencyKaldor–Hicks efficiency, named for Nicholas Kaldor and John Hicks, also known as Kaldor–Hicks criterion, is a measure of economic efficiency that captures some of the intuitive appeal of Pareto efficiency, but has less stringent criteria and is hence applicable to more circumstances...
and inefficiency: a situation is inefficient if someone can be made better off even after compensating those made worse off—even if the lonely hour of compensation never comes.
- Productive inefficiency - says that we could produce the given output at a lower cost—or could produce more output for given cost. For example, a company that is inefficient will have higher operating costs and will be at a competitive disadvantage (or have lower profits than other firms in the market).
- Resource-market inefficiency - refers to barriers that prevent full adjustment of resource markets, so that resources are either unused or misused. For example, structural unemployment results from barriers of mobility in labor markets which prevent workers from moving to places and occupations where there are job vacancies. Thus, unemployed workers can co-exist with unfilled job vacancies.
- X-inefficiencyX-inefficiencyX-inefficiency is the difference between efficient behavior of firms assumed or implied by economic theory and their observed behavior in practice. It occurs when technical-efficiency is not being achieved due to a lack of competitive pressure...
- refers to inefficiency in the "black box" of production, connecting inputs to outputs. This type of inefficiency says that we could be organizing people or production processes more effectively. Often problems of "morale" or "bureaucratic inertia" cause X-inefficiency.
Productive inefficiency, Resource-market inefficiency and X-inefficiency might be analyzed using Data Envelopment Analysis
Data Envelopment Analysis
Data envelopment analysis is a nonparametric method in operations research and economics for the estimation of production frontiers. It is used to empirically measure productive efficiency of decision making units...
and similar methods.