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EspañolALLOCATIVE EFFICIENCY
'Allocative efficiency' is the market condition whereby resources are allocated in a way that maximizes the net benefit attained through their use. Allocative efficiency refers to a situation in which the limited resources of a country are allocated in accordance with the wishes of consumers. An allocatively efficient economy produces an "optimal mix" of commodities. A firm is allocatively efficient when its price is equal to its marginal costs (that is, P = MC) in a perfect market.
A firm is allocatively efficient when its price is equal to its marginal costs (P = MC) in a perfectly competitive market.
A market will be allocatively efficient if it is producing the right goods for the right people at the right price. An allocatively efficient market is therefore one which has no imperfections.
The demand curve is equal to the marginal utility curve i.e. the (private) benefit of the additional unit, while the supply curve is equal to the marginal cost curve i.e. the (private) cost of the additional unit. In a perfect market, there are no externalities, meaning that the demand curve is also equal to the social benefit of the additional unit, while the supply curve is equal to the social cost of the additional unit. Therefore, the market equilibrium, where demand meets supply, is also where marginal social benefit meets marginal social costs. At this point, net marginal social benefit is maximized, meaning this is the allocatively efficient outcome.
If a market or firm is not Pareto efficient, then it cannot be allocatively efficient. If somebody could be made better off without making any other individual worse off, then clearly net benefit is not maximized, and therefore the market is not allocatively efficient. In the same way, an allocatively efficient market or firm is Pareto efficient - net benefit is maximized, therefore no individual can be made better off without another individual being made at least as worse off.
However, it is possible to have Pareto efficiency without allocative efficiency. By shifting resources in the economy, a gain in benefit to one individual could be greater than the loss in benefit to another individual. Therefore, before such a shift, the market is not allocatively efficient, but might be Pareto efficient.
When a market fails to achieve allocative efficiency and resources are not allocated efficiently, there is said to be market failure. Market failure may occur with imperfect knowledge, differentiated goods, resource immobility, concentrated market power, insufficient production, externalities, or inequality of consumers' and producers' bargaining powers.
★ Pareto efficiency
★ Productive efficiency
★ allocative efficiency
| Contents |
| Conditions |
| See also |
| External links |
Conditions
A firm is allocatively efficient when its price is equal to its marginal costs (P = MC) in a perfectly competitive market.
A market will be allocatively efficient if it is producing the right goods for the right people at the right price. An allocatively efficient market is therefore one which has no imperfections.
The demand curve is equal to the marginal utility curve i.e. the (private) benefit of the additional unit, while the supply curve is equal to the marginal cost curve i.e. the (private) cost of the additional unit. In a perfect market, there are no externalities, meaning that the demand curve is also equal to the social benefit of the additional unit, while the supply curve is equal to the social cost of the additional unit. Therefore, the market equilibrium, where demand meets supply, is also where marginal social benefit meets marginal social costs. At this point, net marginal social benefit is maximized, meaning this is the allocatively efficient outcome.
If a market or firm is not Pareto efficient, then it cannot be allocatively efficient. If somebody could be made better off without making any other individual worse off, then clearly net benefit is not maximized, and therefore the market is not allocatively efficient. In the same way, an allocatively efficient market or firm is Pareto efficient - net benefit is maximized, therefore no individual can be made better off without another individual being made at least as worse off.
However, it is possible to have Pareto efficiency without allocative efficiency. By shifting resources in the economy, a gain in benefit to one individual could be greater than the loss in benefit to another individual. Therefore, before such a shift, the market is not allocatively efficient, but might be Pareto efficient.
When a market fails to achieve allocative efficiency and resources are not allocated efficiently, there is said to be market failure. Market failure may occur with imperfect knowledge, differentiated goods, resource immobility, concentrated market power, insufficient production, externalities, or inequality of consumers' and producers' bargaining powers.
See also
★ Pareto efficiency
★ Productive efficiency
External links
★ allocative efficiency
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