Why the Misuse of the Word “Efficiency” Is Such a Problem

An important impediment to understanding valuable insights economists have to offer is that they have trained people to ignore their pronouncements on efficiency. Economists’ common use of a standard of efficiency known as “potential compensation,” which is at odds with a more important concept in which efficiency is advanced whenever there is a Pareto improvement (named after Vilfredo Pareto), is a major reason.

Say there were a policy that supposedly produced $100 in benefits for Adam and imposed $40 in costs on Eve. In that situation, Adam could conceivably compensate Eve with something between $40 and $100. If such compensation was actually arranged and voluntarily agreed to, both parties would reveal their beliefs that the result was efficient because both expected to benefit. That would make such an arrangement a Pareto improvement, because those whose rights were involved were made better off, and no one was harmed. This is what happens in voluntary market transactions. However, in public policy, compensation is not generally paid to the losers, so “potential compensation” is a misleading guide, because some lose, violating the Pareto standard.

When compensation is acceptable and is paid, all parties get more in value than they give up. In such cases, what economists call efficient—in that there is the potential, via compensation, to make all parties better off—is same as what each individual sees as enhanced efficiency for themselves. In that case, there is no gap between the Pareto standard and that based on potential compensation.

But when compensation is not paid, what is alleged to be efficient for society under the potential compensation standard need not be an efficiency improvement for each party. This violates the Pareto standard, because some parties involved are made worse off. In the example above, Eve is made worse off by a supposedly efficient policy. That is why we so often see people strenuously object to “efficient” policies, requiring government coercion to enforce the supposedly beneficial “solution” over their objections.

 
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Πηγή: mises.org