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Graduate School of Business, University of Santa Clara


Two levels of efficiency lie behind the supply and demand equations of neoclassical economic theory. First, firms are assumed to be technically efficient, in that maximum output is obtained from any given mix of inputs. Second, firms are assumed to be allocatively (or price) efficient, in that input and output mixes are chosen such that profits are maximum. Although it has often been argued that firms must be "efficient" in a competitive economy, only a very limited amount of work has been directed to measuring the extent of any inefficiencies. In this paper we provide a framework for such measurements with a special emphasis on decomposing observed inefficiencies into technical and allocative components.

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Economics Commons



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