Economic Efficiency

Uwe Reinhart has been explaining what economists mean by efficiency:

http://economix.blogs.nytimes.com/2010/08/20/is-more-efficient-always-better/

http://economix.blogs.nytimes.com/2010/08/27/when-value-judgments-masquerade-as-science/

Steve Landsburg is quoted and responds:

http://www.thebigquestions.com/2010/08/30/efficiency-experts/

How do economists judge efficiency? A popular method is the so-called Kaldor-Hicks criterion.

Consider the following scenario due to SL: a rich man likes to play loud music and his poorer neighbor likes his peace and quiet. If the poorer guy would be willing to give up his quiet for $1000 and the rich guy would be willing to pay $10,000 to pollute the world with noise, KH says that an ordinance prohibiting noise is inefficient, and in fact produces a dead-weight loss (a favorite term for SL) of $9000 since the rich guy loses a benefit he values at $10 k and the poor guy only gains something he values at $1 k. More efficient, say the believers, would be letting the rich guy pay the poor guy say $3 k, so that the rich guy gets $10 k of value for $3 k and the poor guy nets $2 k after allowing for the $1 k loss of his quiet.

I have a version that I like to consider more pointed. Suppose there is a supply of nutritious grain which can be made into a nutritious gruel capable of sustaining 10 poor families for a year. They can only afford to pay $1000 each family for the grain. Suppose further, that there is a rich man who can afford $20,000 buy the same grain to keep and feed his herd of truffle hunting pigs that supply the truffles for his Sunday night dinner. There would be a $10 k dead weight loss if we let the grain go to the hungry people, so the efficient thing is for them to starve.

Cheers!

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