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• Allocative Efficiency
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Economics
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Being on the curve might still not fully
satisfy allocative efficiency (also
called Pareto efficiency) if it does not
produce a mix of goods that
consumers prefer over other points.
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Economics
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Welfare economics is a normative branch
of economics that uses microeconomic
techniques to simultaneously determine
the allocative efficiency within an economy
and the income distribution associated
with it. It attempts to measure social
welfare by examining the economic
activities of the individuals that comprise
society.
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Decentralization - Critiques
It has been noted that while
decentralization may increase
"productive efficiency" it may
undermine "allocative efficiency" by
making redistribution of wealth more
difficult. Decentralization will cause
greater disparities between rich and
poor regions, especially during times of
crisis when the national government
may not be able to help regions
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Efficiency - In economics
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Allocative efficiency,
an optimal
distribution of goods
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Competition law - Neo-classical synthesis
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Because rational producers will keep producing
and selling, and buyers will keep buying up to the
last Marginalism|marginal unit of possible output –
or alternatively rational producers will be reduce
their output to the margin at which buyers will buy
the same amount as produced – there is no waste,
the greatest number wants of the greatest number
of people become satisfied and Utilitarianism|utility
is perfected because resources can no longer be
reallocated to make anyone better off without
making someone else worse off; society has
achieved allocative efficiency
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Decentralization - Critiques
It has been noted that while
decentralization may increase
productive efficiency it may
undermine allocative efficiency by
making redistribution of wealth more
difficult
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Economic efficiency - Allocative and productive efficiency
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A market can be said to have allocative
efficiency if the price of a product that the
market is supplying is equal to the value
consumers place on it, represented by
marginal cost.
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Economic efficiency - Allocative and productive efficiency
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Because productive resources are scarce,
the resources must be allocated to various
Industries in just the right amounts, otherwise
too much or too little output gets produced.
(Thomas. Government Regulation of
Business. 2013 McGraw-Hill.) When drawing
diagrams for firms, allocative efficiency is
satisfied if the equilibrium is at the point
where marginal cost is equal to average
revenue. This is the case for the long run
equilibrium of perfect competition.
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Law and economics - Normative law and economics
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Normative law and economics goes
one step further and makes policy
recommendations based on the
economic consequences of various
policies. The key concept for
normative economic analysis is
efficiency (economics)|efficiency, in
particular, allocative efficiency.
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Law and economics - Pareto efficiency
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Under the theory of the second best, for
example, if the fulfillment of a subset of
optimal conditions cannot be met under
any circumstances, it is incorrect to
conclude that the fulfillment of any subset
of optimal conditions will necessarily result
in an increase in allocative efficiency.
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Law and economics - Pareto efficiency
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Consequently, any expression of public
policy whose purported purpose is an
unambiguous increase in allocative
efficiency (for example, consolidation of
research and development costs through
increased mergers and acquisitions
resulting from a systematic relaxation of
anti-trust laws) is, according to critics,
fundamentally incorrect, as there is no
general reason to conclude that an
increase in allocative efficiency is more
likely than a decrease.
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Value (economics) - Connected concepts
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The theory of value is closely related to that
of allocative efficiency, the quality by which
firms produce those goods and services most
valued by society. The market value of a
machine part, for example, will depend upon
a variety of objective facts involving its
efficiency versus the efficiency of other types
of part or other types of machine to make the
kind of products that consumers will value in
turn. In such a case, market value has both
objective and subjective components.
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Production function
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The primary purpose of the production
function is to address allocative
efficiency in the use of factor inputs in
production and the resulting
distribution of income to those factors,
while abstracting away from the
technological problems of achieving
technical efficiency, as an engineer or
professional manager might
understand it.
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Production function - The theory of production functions
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(Alternatively, a production function can be
defined as the specification of the minimum
input requirements needed to produce
designated quantities of output.) Assuming
that maximum output is obtained from given
inputs allows economists to abstract away
from technological and managerial problems
associated with realizing such a technical
maximum, and to focus exclusively on the
problem of allocative efficiency, associated
with the economic choice of how much of a
factor input to use, or the degree to which one
factor may be substituted for another
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Production function - The theory of production functions
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The production function is central to
the marginalist focus of neoclassical
economics, its definition of efficiency
as allocative efficiency, its analysis of
how market prices can govern the
achievement of allocative efficiency
in a decentralized economy, and an
analysis of the distribution of income,
which attributes factor income to the
marginal product of factor input.
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Inflation - Negative
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The result is a loss of
economic
efficiency|allocative
efficiency.
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Production possibility frontier
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A PPF can be used to illustrate a number
of economic concepts, such as scarcity of
resources (i.e., the Economic
problem|fundamental economic problem
all societies face), opportunity cost (or
marginal rate of transformation),
productive efficiency, allocative efficiency,
and economies of scale
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Production possibility frontier - Other applications
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However, an economy may achieve
productive efficiency without
necessarily being allocative
efficiency|allocatively efficient
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Paul Samuelson - Fields of interest
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* Public finance theory, in which he is
particularly known for his work on
determining the Allocative
efficiency|optimal allocation of
resources in the presence of both
public goods and private goods.
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X-efficiency - Overview
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In this sense, X-inefficiency focuses on
productive efficiency and minimising costs
rather than allocative efficiency and
maximising welfare.
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Perfect competition - Basic structural characteristics
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They are Allocative efficiency|allocatively
efficient, as output will always occur where
marginal cost is equal to marginal revenue
(MC=MR).
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Industrial policy - Debates on the 'How to' of Industrial Policy
These market failures hinder the
emergence of a well-functioning market
and corrective industrial policies are
required to ensure the allocative efficiency
of a free market
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Inefficiency
*'Allocative efficiency|Allocative
inefficiency' - Allocative inefficiency is a
situation in which the distribution of
resources between alternatives does not
fit with consumer taste (perceptions of
costs and benefits)
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Price inflation - Negative
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The result is a loss of
economic
efficiency|allocative
efficiency.
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Economic theory - Public sector
Welfare economics is a normative
branch of economics that uses
microeconomics|microeconomic
techniques to simultaneously determine
the allocative efficiency within an
economy and the income Distribution
(economics)|distribution associated
with it. It attempts to measure social
welfare by examining the economic
activities of the individuals that
comprise society.Feldman, Allan M.
(1987). welfare economics, The New
Palgrave: A Dictionary of Economics, v.
4, pp. 889–95.
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John Kenneth Galbraith - New industrial state
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The social cost of this monopoly power is
a decrease in both allocative efficiency
and the equity of income distribution
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Lange model - Advantages
Furthermore, because the state uses
marginal cost pricing and determines
entry, monopolies, and the accompanying
lack of allocative efficiency and xinefficiency|x-efficiency can be avoided
under Langean socialism.
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Allocative efficiency
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Allocative efficiency is the main tool of
welfare analysis to measure the impact of
markets and public policy upon society
and subgroups being made better or
worse off.
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Allocative efficiency
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Although there are different standards of
evaluation for the concept of allocative
efficiency, the basic principle asserts
that in any economic system, choices in
resource allocation produce both
winners and losers relative to the choice
being evaluated. The principles of
rational choice, individual
maximization, utilitarianism and market
theory further suppose that the outcomes
for winners and losers can be identified,
compared and measured.
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Allocative efficiency
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Under these basic premises, the goal
of maximizing allocative efficiency
can be defined according to some
neutral principle where some
allocations are objectively better than
others. For example, an economist
might say that a change in policy
increases allocative efficiency as long
as those who benefit from the change
(winners) gain more than the losers
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Allocative efficiency - Conditions
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 (see Kaldor-Hicks efficiency).
Therefore, before such a shift, the market
is not allocatively efficient, but might be
Pareto efficiency|Pareto efficient.
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Private electronic market - Relevance
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The overall effect of a well designed
Private Electronic Market is what is
described as allocative efficiency or
in simple terms: a win-win for the
seller (who maximizes revenue) and
buyers (acquiring exactly what is of
highest value to them). PEMs are
based on game theory and
combinatorial auction theory.
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Financial market efficiency
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The most common type of efficiency
referred to in financial markets is the
allocative efficiency, or the efficiency
of allocating resources. This includes
producing the right goods for the right
people at the right price.
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External
Thus, unregulated Market
(economics)|markets in goods or services
with significant externalities generate
prices that do not reflect the full social cost
or benefit of their transactions; such
markets are therefore Allocative
efficiency|inefficient.
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Productive efficiency
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'Productive efficiency' occurs when the
economy is using all of its resources
efficiently. The concept is illustrated on a
production possibility frontier (PPF)
where all points on the curve are points
of maximum productive efficiency (i.e.,
no more output can be achieved from the
given inputs). An equilibrium may be
productively efficient without being
allocative efficiency|allocatively
efficientmdash; i.e. it may result in a
distribution of goods where social
welfare is not maximized.
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Harvey Leibenstein
The concept of x-efficiency was
introduced by Harvey Leibenstein in his
paper Allocative efficiency v
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Harvey Leibenstein - Selected Publications
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* 1966, Allocative Efficiency vs. X-Efficiency, The
American Economic Review, Vol. LVI., June 1966
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Price gouging - Opposition to laws against price gouging
Allocative efficiency refers to when
prices function properly, markets tend
to allocate resources to their most
valued uses
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David L. Chicoine - Academic articles
*Chicoine, David L., Steven C. Deller,
[http://pfr.sagepub.com/content/21/1/100.s
hort Representative Versus Direct
Democracy: A Test of Allocative Efficiency
in Local Government Expenditures], Public
Finance Review, Vol. 21, No. 1, January
1993.
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