Economic efficiency means that limited resources are used in the best possible way. This happens when it is impossible to make one person better off without making another person worse off, which is known as Pareto optimality.

There are three main types of economic efficiency:

• Allocative efficiency: Resources are used to produce the goods and services that society wants most. This happens when the price of a good equals the cost of producing the last unit.
• Productive efficiency: Goods are produced at the lowest possible cost. This means there is no waste in the production process.
• Dynamic efficiency: This refers to efficiency over a long period. It involves innovation and new technology to improve products and production methods.

These levels of efficiency vary depending on the market structure. For example, perfect competition generally achieves all three types in the long run, whereas a monopoly is often less efficient, though it may occasionally improve through innovation.