The Concept of Economic Efficiency 43 



collective good.^ The ideal of consumer sovereignty is compromised 

 to the extent that there is no market to serve an important segment 

 of human wants. 



Direct Interdependence. The marginal conditions that define 

 efficiency require that satisfaction in consumption derives exclu- 

 sively from an individual's personal consumption of a commodity 

 and is, therefore, independent of the consumption behavior of 

 others. In cases where consumer satisfactions are interrelated, the 

 efficiency conditions we have specified are somewhat ambiguous.^ 

 This problem is not peculiar to the pricing and investment criteria 

 in the water resources field, however,^ and is doubtless of a lower 

 order of significance for this study than its counterpart in the area 

 of production. On the production side, direct interdependence of 

 the production functions of two or more fiscally independent 

 producers could have significant consequences for our efficiency 

 criteria. Hitherto, we have assumed that the output of any firm 

 was exclusively a function of its inputs, and that variable factors 

 would be employed up to the point at which the value of mar- 

 ginal products was equal to the respective factor costs. Under these 

 conditions, costs and gains to the community would be balanced 

 at the margin and no more efficient allocation would be possible. 

 If the production functions of two or more fiscally independent 

 enterprises are interdependent, however, the output of a given 

 enterprise may vary not only with its own use of factors, but also 

 with the way in which the productive resources of another enter- 

 prise are employed.i° Under these conditions, therefore, the value 



' For an elaboration of the notion of "collective or group wants," see Theo 

 Suranyi-Unger, "Individual and Collective Wants," journal of Political Economy, 

 Ffebruary 1948; and William J. Baumol, Welfare Economics and the Theory of 

 the State (Cambridge: Harvard University Press, 1952). 



' For a discussion of questions arising out of interdependence of utility func- 

 tions, see Baumol, ibid.. Chapter vi; and H. Leibenstein, "Bandwagon, Snob 

 and Veblen Effects in the Theory of Consumers' Demand," Quarterly Journal 

 of Economics, May 1950. 



* To the extent that we discuss drawing on the private capital market for 

 investment funds for the water field, we must appreciate the effects of direct 

 dependence among consumers' satisfaction on the savings schedule. For a dis- 

 cussion of this "Duesenberry Effect," see James Duesenberry, Income, Savings, 

 and the Theory of Consumer Behavior (Cambridge: Harvard University Press, 

 1949). 



"J. E. Meade, "External Economies and Diseconomies in a Competitive Situa- 

 tion," Economic Journal, March 1952. 



