ABSTRACT
In my discussion above of purpose A, ranking, I was deliberately a bit vague with respect to what kind of ranking this was supposed to be. Should the ranking be made according to projects’ contributions to social welfare? Their contribution to social efficiency? Is there even a difference between the two? Let me now try to clarify. Efficiency is a commonly used concept both in economics and in public debate, but its meaning is still often ambiguous. At times, the term social efficiency is used to emphasize that the perspective taken is that of the whole society, not of a particular firm or individual; yet, this does not explain how the word “efficiency” itself should be understood. In the present book, “efficiency” and “social efficiency” is used synonymously. Another concept, which is sometimes used to describe the same, is social profitability. While the latter term is infrequently seen in the English language economics literature, it is highly popular in Scandinavia, where its use is widespread among economists and the general public alike.1 There are at least three definitions of social efficiency, which I will return to in a moment: Pareto efficiency, potential Pareto efficiency (or the Hicks-Kaldor criterion), and social welfare improvement. Within the framework of the simplest theoretical textbook models, these are sometimes equivalent or at least not in conflict. In a complex world, their meaning can be quite different.
