Productive efficiency
Productive efficiency is achieved when goods are produced at the lowest possible cost.
Producing the right things is one test. Producing them at the lowest possible cost is another. That second test is productive efficiency.
Productive efficiency is achieved when goods and services are produced at the lowest possible cost, using the least resources for a given output, so that nothing is wasted in the making. It is efficiency in how things are produced, the companion to allocative efficiency, which concerns what is produced.
Producing on the frontier
A firm or economy is productively efficient when it cannot produce more of one good without producing less of another, that is, when it operates on the frontier of what its resources and technology allow rather than inside it. Operating inside the frontier means resources are being squandered: the same inputs could yield more output, or the same output could be had with fewer inputs. Productive efficiency is the absence of that slack.
What drives it
Productive efficiency is driven by competition, good management, and the spur to cut costs. Firms under competitive pressure must produce efficiently or be undercut, which is one of the strongest arguments for competitive markets. Where that pressure is absent, in a sheltered monopoly, a protected public body, or a firm with a comfortable cushion, productive inefficiency can persist, costs drifting upward because nothing forces them down. The discipline of the market is, among other things, a discipline on cost.
Necessary but not sufficient
Productive efficiency is essential but, on its own, hollow. An economy can produce the wrong things with flawless efficiency, churning out at minimum cost goods that people value less than the alternatives those resources could have made. That is why productive and allocative efficiency are both needed: one ensures resources are not wasted in production, the other that they are aimed at what people actually want. Efficiency in the means does not redeem the wrong ends.
Productive efficiency is the more intuitive half of the efficiency story, the part about not wasting resources, doing things cheaply and well. It is necessary for prosperity and, by itself, no guarantee of it, because producing the wrong thing flawlessly is still a kind of waste.