From the perspective of an economist, efficiency means placing a product precisely where it will produce the highest total surplus. This means that the producer or seller of the product is the lowest-cost producer possible, and the consumers of that product are the buyers who value the product the most, leaving the highest possible total surplus.
Producer and consumer surpluses are important as far as determining the market’s equilibrium because if the efficiency is maximized, the equilibrium is being met. This would mean that the product is both being sold by the seller who’s receiving the highest producer surplus and being purchased by the buyers who have the highest consumer surplus. In this perfect scenario, both the producer and the consumer is getting the most out of the transaction. Uber, as discussed in one of my previous blogs, is a prime example of a company who has mastered the art of finding the equilibrium point or, in this case, efficiency.
Market efficiency shouldn’t always be the goal of policy setters. In the case of minimum wage policy, if companies didn’t have one that they had to meet and they could pay their workers anything just to meet their lowest production costs, this would take advantage of many workers. The seller would achieve the highest possible surplus, but it would be at the expense of underpaid labor. This doesn’t necessarily mean there’s a trade off between efficiency and equality. A company can be fair and pay its workers reasonable wages and then maximizing its surplus in any way possible after that. It’s important to not cut corners when it comes to treating workers well. The quality of work will typically reflect how much the workers earn, and if paying them more is increasing sales or the quality of the product and customer satisfaction, then higher wages don’t necessarily mean lower surplus.
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