Economic Efficiency

The term Economic Efficiency refers to the relationship between aggregate benefits and costs to the individuals concerned. Among the widely used efficiency criteria are the Pareto Optimality,the Kaldor-Hicks, the Cost-Benefit, and the Wealth Maximization criterion. In this essay, we discuss economic efficiency as a tool for the social choice among the alternative legal rules. Discussion is carried out by using illustrative examples. We show that in several contexts the efficiency can serve as a useful tool for comparing the legal rules. However, it has serious limitations as well.In several situations, the efficiency criteria can fail to compare legal rules or can lead to contradictory rankings. Moreover, the assumptions underlying some of the efficiency criteria do not hold always. We discuss merits and demerits of various efficiency criteria. It is shown that in the real world, economic efficiency has limitations as a guide for making social choice from among the legal institutions