allocative efficiency

Question 1

different types of costs/beneits if market failure

Answer 1

-private costs:producers cost of production
-social costs: private costs and external costs to third parties as a result of production
-private benefits: individual consumer benefits after consumption
-social benefits: private benefits and third party benefits as a result of consumption

Question 2

allocative efficiency equations

Answer 2

MSB=MSC- society optimum
MPC=MSC-private optimum

Question 3

what is allocative efficiency

Answer 3

-maximisation of: society surplus (CS+PS)
-maximisation of net social benefit: MSB=MPB
-where resources perfectly follow consumer demand

Question 4

assumptions made in the free market

Answer 4

-many buyers/sellers
-no barriers to entry
-perfect information
-firms profit max
-consumers utility max