Originally Posted by Barnett
The first type I will call static efficiency and is, in short, minimization of the deadweight loss described above. In other words, within a given production technology and demand conditions, the most efficient output is where the marginal cost of production equals the value of the product to the marginal consumer (price equals marginal cost).
The second type of efficiency relates to streamlining or otherwise reducing the cost of production using existing technology. I will call this incremental dynamic efficiency. As an example, think of fine tuning a production line so that it can produce ten widgets per hour instead of eight.
The third type of efficiency I will call leapfrog dynamic efficiency, which refers to gains that come from entirely new ways of producing products or services.(4) As an example, think about making video telephone calls on wireless Internet connections rather than landline analog telephones, or automobiles providing transportation rather than horses.
These latter two types of efficiency are dynamic because they shift the supply curve out and change the efficient quantity of production. Since we care about the supply curve, antitrust enforcers care about efficiency, but should we also care about what type of efficiency? The answer is yes, because it turns out that dynamic efficiency — particularly leapfrog dynamic efficiency — accounts for the lion's share of efficiency/welfare gains.
