On efficiency and effectiveness: some definitions

Economics Economic development Australia
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The terms efficiency and effectiveness are commonly used, yet often are applied in slightly and occasionally widely different ways. This paper sets out how the Productivity Commission defines these terms along with related concepts such as cost effectiveness and productivity.

The terms of reference for inquiries and studies undertaken by the Productivity Commission often require the Commission to assess the efficiency and effectiveness of different policies and programs. For example, the terms of reference received on mineral and energy resource exploration asked the Commission to: ‘examine exploration approvals systems and processes, within and across jurisdictions, to assess their effectiveness and efficiency’.

Economics literature uses a variety of terms to express notions of efficiency and effectiveness, as do the literatures of other disciplines. However, these terms are not always defined nor interpreted consistently within and across disciplines. For example, in some dictionaries, ‘efficient’, ‘cost efficient’ and ‘cost effective’ are given as synonyms. While many economists and others would distinguish between these terms their uses do not always align. For example, the term ‘cost effective’ is sometimes used to mean that the outcome of an action was worth more than its cost. Similarly, in everyday language the word ‘efficient’ can meaningfully carry a modifier, like ‘most’ or ‘barely’ or ‘super’. To many economists these terms have very clear and distinct meanings, and such applications are viewed as at best imprecise, and at worst misleading.

So what does the Commission (and most economists) mean when it assesses the efficiency and effectiveness of a policy or program? This research note seeks to provide some clarification.

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