Two centuries ago, Adam Smith proclaimed that, through the workings of the invisible hand, those who pursue their own self-interest in a competitive economy would most effectively promote the public interest. This concept that the rough and tumble of market competition is a potent force for raising output and living standards is one of the most profound and powerful ideas in history.
One of the great achievements of modern economics has understood the exact meaning of Adam Smith's argument. Over the last centuries, economists have refined the notion of public interest and today understand its logic and limitations. Efficiency as economists define it, is a process by which society squeezes the maximum amount of consumer satisfaction out of the available resources. More precisely allocative efficiency occurs when there is no way to recognize production or consumption so that it will increase the satisfaction of one person without reducing the satisfaction of another person. Or to put it another way an efficient situation is one where no one can be made better off without making someone else worse off. Under limited conditions including perfect competition a market economy will display allocative efficiency.
One of the great achievements of modern economics has understood the exact meaning of Adam Smith's argument. Over the last centuries, economists have refined the notion of public interest and today understand its logic and limitations. Efficiency as economists define it, is a process by which society squeezes the maximum amount of consumer satisfaction out of the available resources. More precisely allocative efficiency occurs when there is no way to recognize production or consumption so that it will increase the satisfaction of one person without reducing the satisfaction of another person. Or to put it another way an efficient situation is one where no one can be made better off without making someone else worse off. Under limited conditions including perfect competition a market economy will display allocative efficiency.
