The Concept of Economic Efficiency 17 



this is done at the expense of others it may be only a redistribution 

 of income. Income redistribution may be justified on various 

 ethical grounds. But the reorganization can be regarded as more 

 efficient only when those whose positions have been improved by 

 the changes have gained more than enough to compensate the 

 losses suffered by others. Economic efficiency implies that, given 

 his income, every individual will allocate his expenditures in such 

 a way as to maximize his satisfaction. It implies also that, given 

 the demand for the resulting goods and services, productive 

 resources will be so employed that no reallocation could achieve 

 the same level and composition of output with a smaller expendi- 

 ture of resources. When these conditions are fulfilled, the economy 

 is operating with maximum efficiency. 



The economy is a very complex organism, whose general effi- 

 ciency must be inferred from conditions which exist throughout its 

 various sectors. Our first task is to review the conditions required 

 if efficiency is to prevail in each sector; this will provide the set 

 of criteria needed later. We shall present in this chapter an overly 

 simplified analog of the market economy, so that we can specify 

 the necessary conditions as a matter of first approximation. This 

 will provide a frame of reference which, while unrealistic standing 

 alone, can be modified later in more detailed examination of 

 applications in the instances relevant to this study. Next some of 

 the fundamental qualifications of the model are reviewed to pro- 

 vide the basis for modifying the first approximation of efficiency 

 criteria in order to achieve economic efficiency under actual condi- 

 tions. We shall select from among the numerous qualifications of 

 our theory of resource allocation those which appear most signifi- 

 cant for the questions posed by analysis of multiple purpose river 

 basin development. 



Market Mechanics and Efficiency Criteria 

 in a Perfectly Competitive Economy ^ 



Economists from the time of Adam Smith have worked with an 

 analog of the economic system which suppresses many details in 



'This section, which is a skctcli of the economists' competitive model, is pro- 

 vided in summary form for those who are not familiar with the model or the 

 notion of general cqiiilihriiim. For those who are familiar with the theory of 



