Economic efficiency is achieved when a producer simultaneously gets the maximum possible output from its inputs and combines those inputs in the cheapest way possible given current prices.
The practical question it answers: putting physical performance and cost management together, how well is a farm actually doing overall?
Economic efficiency is the product of the two efficiency concepts already covered in this glossary: Technical Efficiency and Allocative Efficiency. Neither one alone tells the full story; economic efficiency is what results when both are combined.
What Is Economic Efficiency?
Formally, economic efficiency (EE) is calculated as the product of technical efficiency (TE) and allocative efficiency (AE):
EE = TE × AE
A farm scores 100 percent economic efficiency only if it achieves both maximum physical output from its inputs (100 percent technical efficiency) and the cheapest possible combination of those inputs at current prices (100 percent allocative efficiency). Falling short on either component drags the combined score down, and because the two are multiplied rather than averaged, even a farm that scores well on one component will show a noticeably lower economic efficiency score if the other component is weak.
This multiplicative relationship is why economic efficiency is consistently the hardest of the three measures to achieve in published research, and why it is almost always lower than either technical or allocative efficiency taken on its own.
Why Does Economic Efficiency Matter?
It is the single number that captures the full cost of inefficiency, both physical and financial. A farm manager who only tracks technical efficiency could miss substantial income losses coming from a poorly chosen input mix, and vice versa. Economic efficiency forces both problems into view together, which is why it is the headline measure in most applied efficiency research rather than either component alone.
It shows that the two underlying problems often call for different fixes. Because economic efficiency is built from technical and allocative components with different causes — management and agronomic practice behind technical efficiency, input pricing and market access behind allocative efficiency — a low economic efficiency score by itself does not tell a policymaker or extension officer where to intervene. Decomposing it back into its two components is what turns a diagnosis into a plan.
Real research shows the gap between components can run either direction. A stochastic frontier study of rice farming in Ebonyi State, Nigeria, found farmers were 86 percent technically efficient but only 63 percent allocatively efficient, combining to 54 percent economic efficiency — input misallocation was the larger drag. A separate study of crop production among 384 households in eastern Amhara, Ethiopia, found the reverse pattern: 62.5 percent technical efficiency alongside a markedly stronger 86.5 percent allocative efficiency, again combining to almost exactly the same overall figure, 54.1 percent economic efficiency. Two very different underlying problems produced nearly identical bottom-line scores — a result that would be invisible if only the combined economic efficiency figure were reported.
A Worked Example
Using the Ethiopian study’s figures directly: EE = 0.625 (TE) × 0.865 (AE) = 0.541, or 54.1 percent economic efficiency. This means the sampled farms were, on average, obtaining just over half of the output value that would have been possible from their resources if they had matched the best-practice frontier both physically and in how they allocated spending across inputs. In practical terms, closing that gap would not require new land or additional capital — it represents output already within reach using existing resources, split roughly evenly in this case between better agronomic management and a better-chosen input mix.
Key Takeaways
- Economic efficiency combines technical efficiency and allocative efficiency into a single measure: EE = TE × AE.
- A farm can only be fully economically efficient if it is both technically and allocatively efficient at the same time.
- Because the two components are multiplied, economic efficiency is typically lower than either component measured on its own.
- The balance between technical and allocative shortfalls varies by context — Nigerian rice farmers showed more allocative than technical inefficiency, while Ethiopian crop farmers showed the reverse — even when the resulting economic efficiency scores were similar.
- Decomposing a low economic efficiency score back into its technical and allocative components is essential for identifying the right intervention, since the two causes call for different remedies.
Frequently Asked Questions
What is the formula for economic efficiency?
Economic efficiency equals technical efficiency multiplied by allocative efficiency: EE = TE × AE. Both components are typically expressed as percentages or decimals between 0 and 1, so a farm with 70 percent technical efficiency and 80 percent allocative efficiency has an economic efficiency of 56 percent.
What is the difference between economic efficiency and technical efficiency?
Technical efficiency measures only whether a farm achieves the maximum physical output from its inputs. Economic efficiency additionally requires that those inputs be combined in the cheapest way possible given current prices. A farm can be technically efficient while remaining economically inefficient if it uses an expensive input mix.
Why is economic efficiency usually lower than technical or allocative efficiency alone?
Because economic efficiency is the product, not the average, of the two component scores, any shortfall in either one compounds with the other. A farm scoring 90 percent on one component and 90 percent on the other still only reaches 81 percent economic efficiency, illustrating why the combined score is consistently the hardest of the three to achieve.
Continue Exploring
- Technical Efficiency
- Allocative Efficiency
- Agricultural Productivity
- Production Function
- Cost of Production
References and Further Reading
- Farrell, M. J. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society: Series A (General), 120(3), 253–290.
- Economic efficiency of rice farming: a stochastic frontier analysis approach. Journal of Development and Agricultural Economics. https://www.academia.edu/44868105/ECONOMIC_EFFICIENCY_OF_RICE_FARMING_A_STOCHASTIC_FRONTIER_ANALYSIS_APPROACH
- Crop production efficiency in Eastern Amhara, Ethiopia. Discover Food, Springer Nature (2025). https://link.springer.com/article/10.1007/s44187-025-00529-w
- Battese, G. E. & Coelli, T. J. (1995). A model for technical inefficiency effects in a stochastic frontier production function for panel data. Empirical Economics, 20(2), 325–332.
- Determinants of allocative and economic efficiency in crop-livestock integration in western part of Ethiopia, evidence from Horro district: data envelopment approach. PMC. https://pmc.ncbi.nlm.nih.gov/articles/PMC8264118/