Dynamic inefficiency

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Updated: Aug 20, 2021

The equilibrium of an intertemporal economy is dynamically inefficient when it is possible to reallocate resources and achieve a Pareto improvement (make a least one consumer better off and none worse off). To be efficient an equilibrium needs to have an efficient allocation of commodities at each point in time and an efficient allocation of consumption across time. In a dynamically inefficient economy there is excessive saving which leads to excessive capital accumulation and an incorrect allocation of consumption across time. Dynamic efficiency is characterized by the golden rule. See also overlapping generations economy.

Reference: Oxford Press Dictonary of Economics, 5th edt.



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