A Critique of the Definitions of and Tests for Economic Efficiency That Economists and Law and Economics Scholars Use

This chapter presents a critique of the definitions of and tests for economic efficiency that economists and law and economics scholars use. Economists and law and economics scholars use one or more of four definitions of or tests for economic efficiency which include the Pareto-superior/Pareto-inferior definition, the Kaldor–Hicks test, the Scitovsky test, and the potentially Pareto-superior definition. A choice or policy is said to increase allocative efficiency if and only if it brings the economy to a Pareto-superior position. The Pareto-superior/Pareto-inferior definition of economic efficiency is disfavoured not only by its inconsistency with popular and professional understanding and usage but also by the fact that the concept it creates would be completely or virtually useless. The Kaldor–Hicks test for economic efficiency was designed to overcome the basic deficiency of the Pareto-superior/Pareto-inferior definition.