Allocative Efficiency

Question 1

Allocative efficiency

Answer 1

Occurs when there is optimal allocation of resources, P=MC

Question 2

Allocative efficiency vs productive efficiency

Answer 2

More concerned with allocation of resources than by minimising cost.

Question 3

Why do firms wish to achieve allocative efficiency?

Answer 3

No point being productively efficient if all the goods being produced are not actually demanded by the market.

Question 4

Allocative efficiency extension

Answer 4

Occurs where MB = MC.

This is optimal allocation of resources where total welfare is maximised.

Question 5

Perfect competition

Answer 5

Is allocatively efficient

Question 6

Monopoly

Answer 6

Is NOT allocatively efficient

Question 7

Allocative and productive efficiency link

Answer 7

Can be a link (PARTICULARLY PERFECTLY COMPETITIVE)

However…We know they mean different things =

Productive efficiency = minimise costs
Allocative efficiency = optimal distribution.

Question 8

Allocative efficiency limitations

Answer 8

1: lack of competition: market failure most common I markets dominated by few firms. Monopolies restrict supply to the market denying consumers. CREATES ALLOCATIVE INEFFICIENCY.
2: missing markets, failure to provide certain goods eg. Merit and public goods. Therefore under provision of goods.
3: externalities, market prices and profits send misleading signals. Often end up being misleading therefore do not reflect true prices and profits, therefore end up creating a miss allocation.