Another measure of performance of organisations and industries is their efficiency.
Economic efficiency is said to exist when there is technical efficiency – i.e. firms are
operating at the lowest possible cost given the current state of technology, and allocative
efficiency – resources are devoted to producing the goods and services that society
wants. Allocative (or Pareto) efficiency is said to exist when resources cannot be redistributed
between products to make anyone better off without making someone else
worse off. Theoretically, economic efficiency occurs in perfectly competitive markets.
Empirically, it is very difficult to measure technical efficiency, since most organisations
will not have sufficient information to be able to plot their cost curve and therefore its
proximity to lowest cost cannot be ascertained. A possible way of assessing efficiency is
to conduct an efficiency audit, either internally by management or externally by regulatory
bodies. The efficiency of the organisation can be assessed either by comparing its
actual performance with theory or with other organisations in the same industry in this
or other countries.