Allocative efficiency
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Allocative efficiency is a type of economic efficiency in which economy/producers produce only that type of goods and services which are more desirable in the society and also in high demand. According to the formula the point of allocative efficiency is a point where price is equal to Marginal cost (P=MC).[1][2]
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.
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.
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[edit] 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 efficient.
When a market fails to allocate resources efficiently, there is said to be market failure. Market failure may occur because of imperfect knowledge, differentiated goods, concentrated market power (e.g., monopoly or oligopoly), or externalities.
[edit] See also
[edit] References
- ^ Markovits, Richard (1998). Matters of Principle. New York: New York University Press. ISBN 978-0-8147-5513-6.
- ^ Markovits, Richard (2008). Truth or Economics. New Haven: Yale University Press. ISBN 978-0-300-11459-1.
