What is Economic Efficiency? Generally defined as the conditions of an economic sector or a particular activity (like the use of water to grow crops) in which producers are making the “best” use of limited resources If the conditions of efficiency are met, then certain relationships should hold between the rates of use and the rates of trade-off between inputs and outputs Definition of “best” is crucial – what are the objectives, the constraints, and the perspective (whose costs and benefits are considered) 1

How is Economic Efficiency Quantified? Economic efficiency is not a quantity measured on a scale of, say 0 – 100% However, there are indicators of whether the conditions of economic efficiency appear to be satisfied or not 2

Some Potential Indicators of Economic Efficiency Productivity-based indicators Average productivity (AP) of water – crop production divided by applied water Value of AP of water – value of crop production divided by applied water Problems: Averages can be misleading Implication that water is the only important input to production Value of AP jumps around as real crop prices change 3

More Potential Indicators of Economic Efficiency Net returns to water Comparison of existing water use (or application rates) relative to an estimate of the use needed to achieve a specific economic objective Statistical analysis to test whether the conditions of economic efficiency appear to be met (depends on perspective) Benefit-cost analysis to assess how specific water- use-related projects or policies affect net benefits 4

Summary Economic efficiency is different than most traditional measures of WUE – it is a set of conditions, not a quantity measured on a scale of 0-100% Indicators of economic efficiency can be developed, but all have pros and cons 5