Farrell Efficiency

Farrell efficiency measures how well a firm turns its resources into output compared to the best possible firm in the industry. It assesses whether a company is operating at full efficiency by comparing its actual performance to an ideal benchmark. If a firm is fully efficient, it cannot produce more without adding resources; if not, it has room to improve. Think of it like rating a runner’s speed against the fastest possible time: the closer to the top, the higher the efficiency score. This concept helps identify how well a company uses its inputs to generate outputs relative to the best practice.