Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 25

Use a simple two-good model of resource allocation (such as that in Figure) to explain the difference between technical efficiency and economic (or allocative) efficiency. Would you agree with the statement that ''economic efficiency requires technical efficiency, but many technically efficient allocations are not economically efficient''? Explain your reasoning with a graph.
Figure Efficiency of Output Mix
In this economy, the production possibility frontier represents those combinations of X and Y that can be produced. Every point on the frontier is efficient in a technical sense. However, only the output combination at point E is a true utility maximum for the typical person. Only this point represents an economically efficient allocation of resources.