This is where the concept of economic efficiency comes in. If we now took thee prices of the inputs, and found the total cost of each input combination (by summing the products of price and input quantity for each combination), economic efficiency would be achieved by choosing that combination which costs least. Thus, economic efficiency in production relates output to cost, using data on input quantities and prices, and attempts to minimize cost for a given level of output, or, equivalently, to maximize output for a given level of cost. Allocative efficiency relates to the way in which scarce resources are allocated among the goods and services produced by the economy. Resources are said to be allocated efficiently when it is not possible to change the allocation of resources, increasing quantities of some goods and reducing quantities of others, without making someone worse off than before.

That is, if it is possible to reallocate resources and make some people better off (in the sense that they prefer the second situation to the first) while making no one else worse off, then the existing pattern of resource allocation is not efficient. This criterion of efficiency is called the Pareto criterion, after the economist and sociologist V. F. D. PARETO. If a particular allocation of resources is efficient in this sense, then it is called 'Pareto optimal'. If a particular allocation of resources is efficient in this sense, then it is called 'Pareto-optimal'. That branch of economics known as WELFARE ECONOMICS has been largely concerned with the attempt to establish the necessary conditions which must be fulfilled for an efficient allocation of resources. The main practical result of the analysis of allocative efficiency has been a set of propositions about the ways in which certain features of actual economies - Monopolies, Monopsonies, and Indirect Taxation, etc. - impair allocative efficiency and the policy implications these entail.