The Concept of Economic Efficiency 41 



Enterprises allocate their expenditures so that the marginal 

 rates of substitution among factors is equal to the ratio of their 

 prices. Accordingly, no factor substitutions can take place to 

 increase output for a given outlay. Moreover, they make outlays 

 for productive resources up to the point at which the cost of the 

 marginal inputs is equal to the price of the product for which 

 they are employed. Marginal costs in each line of production are 

 then equal to the product prices — or, abstracting from prices, to 

 the marginal valuation of the products or consumer services by the 

 individuals in the community. In the competitive model, of comse, 

 marginal costs reflect ultimately the marginal sacrifice of current 

 consumption and leisure, and thus reflect real costs. Hence, the 

 marginal valuation of the sacrifices are just equal to the marginal 

 valuation of the gains. No reorganization of any sort can achieve 

 any net gain. Accordingly, any reallocation which would improve 

 anyone's position could be done only at the expense of another, 

 and hence would represent a redistribution of income rather than 

 any gain in economic efficiency. The marginal conditions required 

 for economic efficiency are met, and the economy is in a state of 

 competitive equilibrium. 



Critical Review of Sojne Fundamental Assumptions 

 of the Competitive Model 



Everyone knows that the economy in real life departs significantly 

 in a number of respects from the competitive model. However, the 

 model provides a beginning point for understanding the economiz- 

 ing principles in a market economy and the nature of the solutions 

 to problems of economic efficiency. Having a foinial apj)aratus 

 that provides a set of efficiency criteria, we next go behind the 

 criteria to examine the realism of some of the assumptions for 

 treating comparative efficiency in the water development field. 



In abstracting from nuich of the detail found in the actual 

 economy, the competitive model leaves out of consideration two 

 sorts of information which coukl conij)roniise its general utility. 

 Some of the relevant excluded information might cjualify the 

 utility of the model for guiding efficiency decisions. Conceivable 

 departures from comi)etitivc (onditions in actual maikets may 

 result in a constellation of costs and prices not directly useful in 



