Efficiency refers to how effectively an economy uses limited resources to create the highest level of output or satisfaction.

There are three main types of efficiency:

• Allocative efficiency: A situation where resources are distributed to maximize the total benefit for both consumers and producers.
• Productive efficiency: Producing goods or services at the lowest possible cost.
• X-inefficiency: Occurs when a business fails to produce at the minimum possible cost, usually due to a lack of competition.

In many cases, markets may not achieve these efficient results on their own, often requiring government intervention to improve outcomes.