Efficiency

Efficiency is the economic idea that output cannot be maximized beyond what it is without increasing the number of inputs.  "The most bang for your buck", if you will.  When taking into consideration a free market economy there are two ideas that contribute to whether or not resources are being allocated efficiently - consumer/producer surplus and market failure.  Consumer surplus is a buyer's willingness to pay minus what they actually pay for a good.  Similarly, producer surplus is what a seller is paid minus what it cost to produce a good.  Resources are considered efficient when the sum of consumer and producer surplus is maximized.  In more practical terms, producers who sell a good at the highest price possible are going to yield the smallest amount demanded by buyers thereby not being very efficient.  Sellers in this situation basically have produced too much with very few people willing to buy.  In contrast, producers who sell their good at the lowest possible price are going to yield the greatest amount demanded, thereby by maximizing the total amount of producer surplus and becoming most efficient.  Relatedly, goods will be sold to buyers who either value the good the most and/or have the greatest willingness to pay.  Both of these resource allocations lead to market efficiency.

In contrast, market failure - which can be characterized by market power and externalities - are the forces that prevent markets from existing efficiently.  Market power is the idea that a small group, or perhaps just one producer is the driving force behind market prices due to not having any competition.  For example, say Sony was the only manufacturer of TV's and for this reason charged as much as it costs for a car to purchase a television.  This act would disrupt the otherwise natural equilibrium of supply and demand of TV's.  No one is going to want to nor be able to afford a Sony television making the market for TV's inefficient.  The other disruptive force of efficiency are externalities.  These are influences beyond either the producer or consumers control.  They are not things taken into consideration on either side when deciding how much to purchase or how much to manufacture.  As a result of these unforeseen influences, it  can alter the equilibrium of what is in the best interest of all people affected, again making the market inefficient.