Allocative Efficiency

• Allocative Efficiency

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Economics

1 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.


Economics

1 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.https://store.theartofservice.com/the-allocative-efficiency-toolkit.html

Decentralization - Critiques

1 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 needing it.https://store.theartofservice.com/the-allocative-efficiency-toolkit.html

Efficiency - In economics

1 Allocative efficiency, an optimal

distribution of goods


Competition law - Neo-classical synthesis

1 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


Decentralization - Critiques

1 It has been noted that while decentralization may increase productive efficiency it may

undermine allocative efficiency by making redistribution of wealth more

difficult


Economic efficiency - Allocative and productive efficiency

1 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.


Economic efficiency - Allocative and productive efficiency

1 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.


Law and economics - Normative law and economics

1 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.


Law and economics - Pareto efficiency

1 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.


Law and economics - Pareto efficiency

1 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.


Value (economics) - Connected concepts

1 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.


Production function

1 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.https://store.theartofservice.com/the-allocative-efficiency-toolkit.html

Production function - The theory of production functions

1 (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


Production function - The theory of production functions

1 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.https://store.theartofservice.com/the-allocative-efficiency-toolkit.html

Inflation - Negative

1 The result is a loss of economic efficiency|allocative efficiency.


Production possibility frontier

1 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


Production possibility frontier - Other applications

1 However, an economy may achieve productive efficiency without necessarily being allocative

efficiency|allocatively efficient


Paul Samuelson - Fields of interest

1 * 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.


X-efficiency - Overview

1 In this sense, X-inefficiency focuses on productive efficiency and minimising costs rather than

allocative efficiency and maximising welfare.


Perfect competition - Basic structural characteristics

1 They are Allocative efficiency|allocatively efficient, as output will

always occur where marginal cost is equal to marginal revenue (MC=MR).


Industrial policy - Debates on the 'How to' of Industrial Policy

1 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


Inefficiency

1 *'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)


Price inflation - Negative

1 The result is a loss of economic efficiency|allocative efficiency.


Economic theory - Public sector

1 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.


John Kenneth Galbraith - New industrial state

1 The social cost of this monopoly power is a decrease in both

allocative efficiency and the equity of income distribution


Lange model - Advantages

1 Furthermore, because the state uses marginal cost pricing and determines

entry, monopolies, and the accompanying lack of allocative efficiency and x-inefficiency|x-

efficiency can be avoided under Langean socialism.


Allocative efficiency

1 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.



1 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.



1 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 lose.


Allocative efficiency - Conditions

1 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.


Private electronic market - Relevance

1 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.


Financial market efficiency

1 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.


External

1 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.


Productive efficiency

1 '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.


Harvey Leibenstein

1 The concept of x-efficiency was introduced by Harvey Leibenstein in

his paper Allocative efficiency v


Harvey Leibenstein - Selected Publications

1 * 1966, Allocative Efficiency vs. X-Efficiency, The American Economic Review, Vol. LVI.,

June 1966


Price gouging - Opposition to laws against price gouging

1 Allocative efficiency refers to when prices function properly, markets tend to allocate resources to their

most valued uses


David L. Chicoine - Academic articles

1 *Chicoine, David L., Steven C. Deller, [http://pfr.sagepub.com/content/21/1/

100.short 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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Allocative Efficiency