Abstract:
Efficiency measurements have been a great concern of researchers with
an aim to study the efficiency levels of almost all economic activities.
Empirical estimation and identifying the determinants of efficiency are
the major tasks in efficiency analysis. The main objective of this study is
to investigate major changes taken place in the methodology of technical
and allocative efficiency in economics. The historical approach is used as
the methodology of this study. There was no accepted statistical
methodology to measure economic, technical and allocative efficiencies
until the study of Farrell (1957); “The Measurement of Productive
efficiency”. In economics, economic efficiency has two components
which are referred to as technical efficiency and allocative efficiency.
Technical efficiency is associated with the ability to produce on the
frontier isoquant, while allocative efficiency refers to the ability to
produce at a given level of output using the cost-minimizing input ratios.
Few alternative parametric methods are available in literature such as
production, cost, profit, revenue and distance functions to analyze
efficiency by estimating production technology. The nonparametric
methodology involves mainly the use of linear programming techniques.
According to available literature, it is clear that various approaches to
efficiency analysis have been developed by two parallel traditions, the
econometric method and the non-parametric data envelopment analysis.
Each of these traditions incorporate its inherent merits and demerits.
Findings of the study reveal that input distance function is the best
methodology for measuring allocative efficiency if inputs quantities do
not significantly vary across units of studies.
