It is well known that nowadays, due to the development of commercial activities, economic relations play a significant role in society. Therefore, it is crucial for people to understand fundamental economic concepts, especially for those who work in a trading environment. One of the most significant economic notions is exchange efficiency. Therefore, the main goal of this presentation is to provide the audience with all the necessary information about the meaning of exchange efficiency. Also, the reasons why it should be studied and why it matters will be discussed. In addition, the examples that show the value of exchange efficiency will be demonstrated.
Exchange efficiency is one of the conditions of Pareto Optimality. Pareto Optimality is a concept that was invented by an Italian economist, Vilfredo Pareto. This concept is a state in the economy when any possible changes cannot make one person economically wealthier without worsening the economic situation of another individual (Zhu, Xu and Goodman, 2016, p. 299). It can be achieved when the economy is competitive and in a condition of equilibrium, which is also reached by the price balance. The price balance ensures that the revenue product, the opportunity cost, and the price of a resource are all equal. In these conditions, every item or service is in its most productive estate. As a result, there are no changes that can lead to higher productivity. In order to achieve this equilibrium, it is necessary to meet three requirements, namely, exchange efficiency, production efficiency, and output efficiency. In the context of this presentation, the focus will be on the first criteria, which is exchange efficiency.
Exchange efficiency is a specific condition that occurs in the market when it is not possible to redistribute goods in a way so the welfare of one consumer could be raised without reducing the well-being of another consumer (Ventura, Cafiero and Montibeller, 2016, p.872). It is necessary to notice that exchange efficiency alone does not lead to Pareto Optimality because it belongs only to a specific kind of goods.
At present, exchange efficiency is a significant component of economics as it has a number of advantages. First of all, exchange efficiency (or efficiency in consumption) implies the type of exchange when all goods and services are distributed to their highest value. Second, it facilitates trade relations, because the products that are produced go to the people who value them the most. For example, if one individual likes milk chocolate, and another one likes dark chocolate, these people enter trade relations in order to get what they want. Therefore, the main idea of exchange efficiency is to ensure that trade collaboration is done so the people who value milk chocolate and dark chocolate the most are the people who have it. Moreover, exchange efficiency is a necessary component of Pareto Optimality, which is essential for building competitive equilibria in the market. There is another reason why Pareto efficiency is important in economics. It provides a common standard that allows comparing economic outcomes in the market.
It is worth to mention that this standard also has some drawbacks. For example, there can be many economic situations and Pareto does not provide precise and clear criteria on what can be considered efficient. For instance, if two people found a bill on the road, their behavior can be different. The bill can be taken by one of them or they can split it for two parts. In this case, it is not clear who gains, as there can be different scenarios. Therefore, there is a concern among economists about identifying the efficiency of certain situations and creating economic laws and rules that will help to achieve efficiency and eliminate inefficiency. To achieve these goals, it is necessary to continue studying this concept and develop new economic standards.
In order to better understand the meaning of exchange efficiency, it is worth to introduce several examples. The simplest example of exchange efficiency is when two people have different goods. Thus, one of them has a piece of bread, and the other one has some ham. For instance, these people can perform an exchange of their goods. However, the law of exchange efficiency allows performing an exchange only until the moment when no one can make better off without one of them making worse off. When more individuals take part in the exchange, the process is different as it usually implies the use of financial means. However, the principle of performing the exchange process is similar.
Another example of exchange efficiency can be the situation when a person has some cookies and his or her friend asks to share. If an individual feels happy to give a cookie to his friend, then this exchange will be inefficient, as it does not make anyone worse off while making someone better off. This situation, when both parties win, is called Pareto Improvement. However, the scenario is different if a person gives cookies to the friend having a feeling of loss. In this case, the exchange is efficient, as the welfare of one friend was reduced while another friend gained. Unfortunately, sometimes, it is impossible to consider if an exchange is efficient or not as using metrics does not provide any information about the desire of people to make an exchange.
All the above-mentioned examples are the simplest as they are introduced in order to understand the idea of exchange efficiency. Nowadays, due to globalization and the development of trade relations between different countries, the process of exchange is more complicated, as it usually involves more than just two parties. However, the described examples aimed to demonstrate the main idea of exchange efficiency, which is allowing consumers to possess what they value the most.
Therefore, it can be concluded that exchange efficiency or efficiency in consumption is one of the main conditions that are necessary for Pareto Optimality. Pareto Optimality is a significant concept in the economy that occurs when any possible changes cannot make one person economically wealthier without worsening the economic situation of another individual. The most significant value of this concept is that it provides a common standard that allows comparing economic outcomes in the market. As for the exchange efficiency, it also plays a significant role in the market as it involves consumers into trade relations and allows them to obtain what they need. Therefore, there are two correlated concepts, namely, exchange efficiency and Pareto Optimality, which should be further studied and used in the economy in order to achieve efficiency in the market. Demonstrated examples were provided to help readers better understand the meaning of these concepts and why they matter.
Reference List
Ventura, A., Cafiero, C. and Montibeller, M. (2016) ‘Pareto efficiency, the Coase theorem, and externalities: A critical view’, Journal of Economic Issues, 50(3), pp. 872-895.
Zhu, C., Xu, L. and Goodman, E. (2016) ‘Generalization of Pareto-Optimality for many-objective evolutionary optimization’, IEEE Transactions on Evolutionary Computation, 20(2), pp. 299-315.