Efficiency and Market Failure

Question 1

pareto efficiency

Answer 1

an allocation of
resources is said to be
a Pareto optimum if no
reallocation of resources
can make an individual
better off without making
some other individual
worse off

Question 2

productive efficiency

Answer 2

attained when a firm
operates at minimum
average total cost,
choosing an appropriate
combination of inputs
(cost efficiency) and
producing the maximum
output possible from
these inputs (technical
efficiency

Question 3

allocative efficiency

Answer 3

achieved when society
is producing an
appropriate bundle
of goods relative to
consumer preferences –
this occurs when price
equals marginal cost

Question 4

dynamic efficiency

Answer 4

view of efficiency that
takes into account the
effects of innovation
and technological
progress on productive
and allocative efficiency
in the long run

LRAC shifts downward over time

Question 5

economies of scale

Answer 5

economies of scale:
occur for a firm when
an increase in the scale
of production leads to
production at lower
long-run average cost

Question 6

market failure

Answer 6

free-market equilibrium
does not lead to a socially
optimal allocation of
resources, such that too
much or too little of a
good is being produced
and/or consumed

price mechanism fails to allocate resources in the most efficient way, leading to a net social welfare loss

Question 7

MSC

Answer 7

the cost to
society of producing an
extra unit of a good

remember you cannot use short forms the very first time you introduce the concept in an essay (state full form, put short form in brackets)

Question 8

MSB

Answer 8

the additional
benefit that society
gains from consuming
an extra unit of a good

Question 9

asymmetrical information

Answer 9

situation in which some
participants in a market
have better information
about market conditions
than others