* David Havyatt is the Senior Economist with Energy Consumers Australia. Prior to this role he spent thirty years in the telecommunications industry including regulatory roles with AAPT and Unwired. He also worked as a Special Adviser to Senator Stephen Conroy as Minister for Communications and the Digital Economy. The views in this paper are his own. He would like to acknowledge the assistance of Rod Sims, Peter Harris and Rod Shogren in the history of policy advice. Issue 62 March 2017 The Components of Efficiency David Havyatt* Few issues papers, reports or decisions in Australian regulation that refer to economic efficiency fail to refer to what the author calls the ‘Hilmer trilogy’; the assertion that economic efficiency has three components, technical or productive, allocative and dynamic. The prominence given to this statement, its repetition and its invocation of the Hilmer report is somewhat surprising. In 1993, when the report was written, Hilmer was Dean of the Australian Graduate School of Management, a position he had held since 1989. For 19 years before that he worked as a management consultant at McKinsey & Company, the last nine managing the Australian practice. He certainly would never have been called as an expert economic witness in a competition or regulatory matter. There is no doubt that allocative, productive and dynamic factors can contribute to economic efficiency. As will be discussed later, it is possible to argue that the list is not complete and that the three factors identified are not really equal. Given how frequently the Hilmer trilogy is cited, and that a statement in a government report isn’t really an authority on economics, there is an attempt to identify an original source. The trilogy appears in the Hilmer report in the first chapter ‘Towards a National Competition Policy’. Section A is headed ‘Competition and Competition Policy’ and sub-section 1 is headed ‘Competition and Community Welfare’. It appears after a paragraph that reads: The relationship between competition and community welfare can be considered in terms of the impact of competition on economic efficiency and on other social goals. Two further divisions occur within the section; one on economic efficiency and one on other social goals. The first of these begins: Efficiency is a fundamental objective of competition policy because of the role it plays in enhancing community welfare. There are three components of economic efficiency: • Technical or productive efficiency, which is achieved where individual firms produce the goods and services that they offer to consumers at least cost. Competition can enhance technical efficiency by, for example, stimulating improvements in managerial performance, work practices, and the use of material inputs. • Allocative efficiency is achieved where resources used to produce a set of goods or services are allocated to their highest valued uses (ie, those that provide the greatest benefit relative to costs). Competition tends to increase allocative efficiency, because firms that can use particular resources more productively can afford to bid those resources away from firms that cannot achieve the same level of returns. • Dynamic efficiency reflects the need for industries to make timely changes to technology and products in response to changes in consumer tastes and in productive opportunities. Competition in markets for goods and services provides incentives to undertake research and development, effect innovation in product design, reform management structures and strategies and create new products and production processes. Contents Lead Article 1 From the Journals 8 Regulatory Decisions in Australia and New Zealand 12 Notes on Interesting Decisions 18 Regulatory News 20