Effiency And Market Failure Flashcards
Q: What is productive efficiency?
A: Productive efficiency is the situation in which goods are produced at the lowest possible cost, meaning resources are used in the most efficient way.
Q: What is allocative efficiency?
A: Allocative efficiency occurs when the value consumers place on a good or service (reflected in the price they are willing to pay) equals the cost of the resources used in production.
Q: What are the conditions for productive efficiency?
A: The conditions for productive efficiency are that production must occur at the minimum average total cost, and firms must be exploiting all economies of scale.
Q: What are the conditions for allocative efficiency?
A: Allocative efficiency requires that the price of a good equals its marginal cost and marginal benefit, ensuring resources are used to produce the mix of goods and services most desired by society.
Q: What is Pareto optimality?
A: Pareto optimality is a situation where no individual can be made better off without making someone else worse off, indicating that resources are allocated in the most efficient way.
Q: What is dynamic efficiency?
A: Dynamic efficiency is the efficiency with which resources are allocated over time, often involving investment in innovation and technology to improve future productive and allocative efficiency.
Q: What is market failure?
A: Market failure occurs when the allocation of goods and services by a free market is not efficient, leading to a net social welfare loss.
Q: What are some reasons for market failure?
A: Reasons for market failure include externalities, information failures, merit and demerit goods, public goods, firm dominance in a market, factor immobility, and equity issues.
Q: How do demand and supply curves relate to efficiency?
A: Demand and supply curves represent marginal benefit and marginal cost, respectively. Allocative efficiency is achieved when the price equals both the marginal benefit and marginal cost.
Q: What happens at the point of allocative efficiency?
A: At allocative efficiency, the price equals marginal cost, and resources are distributed to produce the combination of goods and services most desired by consumers, maximizing economic welfare.
Q: What does the production possibility curve (PPC) illustrate?
A: The PPC illustrates the maximum possible output combinations of two goods that an economy can achieve with a given amount of resources.
Q: What is X-inefficiency?
A: X-inefficiency occurs when a firm does not operate at minimum cost due to a lack of competitive pressure, leading to organizational slack.
Q: How does competition affect efficiency?
A: Competition can lead to both productive and allocative efficiency, but perfect competition is the only market structure where this is fully achieved.
Q: How do externalities cause market failure?
A: Externalities cause market failure when the costs or benefits of production or consumption are not reflected in market prices, leading to overproduction or underproduction.
Q: What role does information failure play in market failure?
A: Information failure, where some market participants have better information than others, can lead to suboptimal decisions and market outcomes.
