There are two key types of economic efficiency:

1. Productive Efficiency:

This occurs when goods and services are produced at the lowest possible cost. In other words, no resources are wasted, and firms are producing as much as they can with the least amount of inputs. An economy is productively efficient when it operates on its production possibility frontier (PPF), meaning it cannot produce more of one good without reducing the output of another good.

Example: A factory that produces cars using the least amount of labor, materials, and capital possible while maintaining quality is operating with productive efficiency.

2. Allocative Efficiency:

Allocative efficiency occurs when the mix of goods and services produced matches consumer preferences. This means resources are allocated in a way that maximizes overall satisfaction in society, ensuring that goods are distributed to those who value them the most. Prices reflect both the value consumers place on goods and the cost of producing them.

Example: A situation where the right number of healthcare services, smartphones, and food products are produced to meet the demand of consumers. If people prefer more healthcare services, and resources are allocated to increase healthcare production, then allocative efficiency is achieved.

Characteristics of Economic Efficiency:

• No Waste: Resources (labor, capital, raw materials) are used to their fullest potential without being wasted.
• Marginal Benefit Equals Marginal Cost: In allocative efficiency, goods are produced in quantities where the marginal benefit (the extra satisfaction from consuming one more unit) equals the marginal cost (the cost of producing one more unit).
• Pareto Optimality: A state of economic efficiency where it’s impossible to make one person better off without making someone else worse off.

Examples of Economic Inefficiency:

• Underemployment: When workers are employed in jobs that don't fully utilise their skills or when unemployment is high, productive inefficiency exists.
• Market Failure: When externalities (like pollution) are not accounted for, markets might fail to allocate resources efficiently, leading to overproduction or underproduction of certain goods.

In essence, economic efficiency strives for a balance where resources are used optimally to meet society's needs without waste. It forms the basis of economic policies aimed at improving welfare and achieving sustainable growth.