Efficiency Principle

DEFINITION of 'Efficiency Principle'

An economic theory that states that the greatest benefit to society of any action is achieved when the marginal benefits from the allocation of resources are equivalent to the marginal social costs of the allocation.

BREAKING DOWN 'Efficiency Principle'

The efficiency principle lays the theoretical groundwork for cost-benefit analysis, which is how most critical business decisions regarding the allocation of resources are made. On its own, however, there are simply too many assumptions that must be made to determine "marginal social costs", which makes the usefulness of the efficiency principle questionable in practical terms.

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RELATED FAQS
  1. How do companies use marginal analysis?

    Find out how and why companies rely on marginal analysis, particularly when developing a cost-benefit approach for future ... Read Answer >>
  2. How is marginal analysis used in making a managerial decision?

    Discover why understanding marginal analysis helps to identify the optimal distribution of resources and planning for an ... Read Answer >>
  3. What is the difference between marginal analysis and cost benefit analysis?

    Read about the differences between marginal analysis and cost-benefit analysis, and why marginalism is a crucial concept ... Read Answer >>
  4. How do fixed assets become impaired?

    Find out how an investor can use the procedure of marginal analysis to make investment decisions by comparing marginal costs ... Read Answer >>
  5. What are common use cases for marginal analysis?

    Read about some of the common uses of marginal analysis, including cost-benefit decisions in business or deciding how to ... Read Answer >>
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