allocative efficiency
TRANSCRIPT
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• Allocative Efficiency
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Economics
1 Being on the curve might still not fully satisfy allocative efficiency (also called Pareto efficiency) if it does not
produce a mix of goods that consumers prefer over other points.
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Economics
1 Welfare economics is a normative branch of economics that uses microeconomic techniques to simultaneously determine the allocative efficiency within an
economy and the income distribution associated with it. It attempts to
measure social welfare by examining the economic activities of the
individuals that comprise society.https://store.theartofservice.com/the-allocative-efficiency-toolkit.html
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Decentralization - Critiques
1 It has been noted that while decentralization may increase "productive efficiency" it may
undermine "allocative efficiency" by making redistribution of wealth more difficult. Decentralization will cause greater disparities between rich and poor regions, especially during times
of crisis when the national government may not be able to help
regions needing it.https://store.theartofservice.com/the-allocative-efficiency-toolkit.html
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Efficiency - In economics
1 Allocative efficiency, an optimal
distribution of goods
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Competition law - Neo-classical synthesis
1 Because rational producers will keep producing and selling, and buyers will keep buying up to the last Marginalism|marginal unit of possible output – or alternatively rational producers will be reduce
their output to the margin at which buyers will buy the same amount as produced – there is no waste, the greatest number wants of the greatest number
of people become satisfied and Utilitarianism|utility is perfected because resources can no
longer be reallocated to make anyone better off without making someone else worse off; society
has achieved allocative efficiency
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Decentralization - Critiques
1 It has been noted that while decentralization may increase productive efficiency it may
undermine allocative efficiency by making redistribution of wealth more
difficult
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Economic efficiency - Allocative and productive efficiency
1 A market can be said to have allocative efficiency if the price of a product that the market is supplying
is equal to the value consumers place on it, represented by marginal
cost.
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Economic efficiency - Allocative and productive efficiency
1 Because productive resources are scarce, the resources must be allocated to various
Industries in just the right amounts, otherwise too much or too little output gets produced. (Thomas. Government Regulation
of Business. 2013 McGraw-Hill.) When drawing diagrams for firms, allocative
efficiency is satisfied if the equilibrium is at the point where marginal cost is equal to average revenue. This is the case for the
long run equilibrium of perfect competition.
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Law and economics - Normative law and economics
1 Normative law and economics goes one step further and makes policy recommendations based on the
economic consequences of various policies. The key concept for
normative economic analysis is efficiency (economics)|efficiency, in
particular, allocative efficiency.
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Law and economics - Pareto efficiency
1 Under the theory of the second best, for example, if the fulfillment of a
subset of optimal conditions cannot be met under any circumstances, it is
incorrect to conclude that the fulfillment of any subset of optimal conditions will necessarily result in an increase in allocative efficiency.
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Law and economics - Pareto efficiency
1 Consequently, any expression of public policy whose purported purpose is an unambiguous increase in allocative efficiency (for example, consolidation of research and development
costs through increased mergers and acquisitions resulting from a systematic
relaxation of anti-trust laws) is, according to critics, fundamentally incorrect, as there is no general reason to conclude that an increase in allocative efficiency is more likely than a
decrease.
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Value (economics) - Connected concepts
1 The theory of value is closely related to that of allocative efficiency, the quality by which
firms produce those goods and services most valued by society. The market value of a
machine part, for example, will depend upon a variety of objective facts involving its
efficiency versus the efficiency of other types of part or other types of machine to make the kind of products that consumers will value in turn. In such a case, market value has both
objective and subjective components.
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Production function
1 The primary purpose of the production function is to address allocative efficiency in the use of
factor inputs in production and the resulting distribution of income to
those factors, while abstracting away from the technological problems of achieving technical efficiency, as an engineer or professional manager
might understand it.https://store.theartofservice.com/the-allocative-efficiency-toolkit.html
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Production function - The theory of production functions
1 (Alternatively, a production function can be defined as the specification of the minimum input
requirements needed to produce designated quantities of output.) Assuming that maximum
output is obtained from given inputs allows economists to abstract away from technological
and managerial problems associated with realizing such a technical maximum, and to focus exclusively on the problem of allocative efficiency, associated with the economic choice of how much
of a factor input to use, or the degree to which one factor may be substituted for another
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Production function - The theory of production functions
1 The production function is central to the marginalist focus of neoclassical economics, its definition of efficiency as allocative efficiency, its analysis of
how market prices can govern the achievement of allocative efficiency in a decentralized economy, and an
analysis of the distribution of income, which attributes factor income to the
marginal product of factor input.https://store.theartofservice.com/the-allocative-efficiency-toolkit.html
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Inflation - Negative
1 The result is a loss of economic efficiency|allocative efficiency.
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Production possibility frontier
1 A PPF can be used to illustrate a number of economic concepts, such
as scarcity of resources (i.e., the Economic problem|fundamental
economic problem all societies face), opportunity cost (or marginal rate of
transformation), productive efficiency, allocative efficiency, and
economies of scale
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Production possibility frontier - Other applications
1 However, an economy may achieve productive efficiency without necessarily being allocative
efficiency|allocatively efficient
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Paul Samuelson - Fields of interest
1 * Public finance theory, in which he is particularly known for his work on
determining the Allocative efficiency|optimal allocation of resources in the
presence of both public goods and private goods.
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X-efficiency - Overview
1 In this sense, X-inefficiency focuses on productive efficiency and minimising costs rather than
allocative efficiency and maximising welfare.
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Perfect competition - Basic structural characteristics
1 They are Allocative efficiency|allocatively efficient, as output will
always occur where marginal cost is equal to marginal revenue (MC=MR).
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Industrial policy - Debates on the 'How to' of Industrial Policy
1 These market failures hinder the emergence of a well-functioning market and corrective industrial
policies are required to ensure the allocative efficiency of a free market
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Inefficiency
1 *'Allocative efficiency|Allocative inefficiency' - Allocative inefficiency
is a situation in which the distribution of resources between alternatives does not fit with consumer taste
(perceptions of costs and benefits)
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Price inflation - Negative
1 The result is a loss of economic efficiency|allocative efficiency.
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Economic theory - Public sector
1 Welfare economics is a normative branch of economics that uses microeconomics|
microeconomic techniques to simultaneously determine the allocative efficiency within an
economy and the income Distribution (economics)|distribution associated with it. It
attempts to measure social welfare by examining the economic activities of the
individuals that comprise society.Feldman, Allan M. (1987). welfare economics, The New
Palgrave: A Dictionary of Economics, v. 4, pp. 889–95.
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John Kenneth Galbraith - New industrial state
1 The social cost of this monopoly power is a decrease in both
allocative efficiency and the equity of income distribution
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Lange model - Advantages
1 Furthermore, because the state uses marginal cost pricing and determines
entry, monopolies, and the accompanying lack of allocative efficiency and x-inefficiency|x-
efficiency can be avoided under Langean socialism.
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Allocative efficiency
1 Allocative efficiency is the main tool of welfare analysis to measure the impact of markets and public policy upon society and subgroups being
made better or worse off.
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Allocative efficiency
1 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.
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Allocative efficiency
1 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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Allocative efficiency - Conditions
1 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 efficiency|Pareto efficient.
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Private electronic market - Relevance
1 The overall effect of a well designed Private Electronic Market is what is described as allocative efficiency or in simple terms: a win-win for the
seller (who maximizes revenue) and buyers (acquiring exactly what is of
highest value to them). PEMs are based on game theory and
combinatorial auction theory.
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Financial market efficiency
1 The most common type of efficiency referred to in financial markets is the allocative efficiency, or the efficiency of allocating resources. This includes
producing the right goods for the right people at the right price.
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External
1 Thus, unregulated Market (economics)|markets in goods or
services with significant externalities generate prices that do not reflect
the full social cost or benefit of their transactions; such markets are therefore Allocative efficiency|
inefficient.
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Productive efficiency
1 'Productive efficiency' occurs when the economy is using all of its resources efficiently.
The concept is illustrated on a production possibility frontier (PPF) where all points on the
curve are points of maximum productive efficiency (i.e., no more output can be achieved from the given inputs). An equilibrium may be productively efficient without being allocative
efficiency|allocatively efficientmdash; i.e. it may result in a distribution of goods where social
welfare is not maximized.
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Harvey Leibenstein
1 The concept of x-efficiency was introduced by Harvey Leibenstein in
his paper Allocative efficiency v
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Harvey Leibenstein - Selected Publications
1 * 1966, Allocative Efficiency vs. X-Efficiency, The American Economic Review, Vol. LVI.,
June 1966
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Price gouging - Opposition to laws against price gouging
1 Allocative efficiency refers to when prices function properly, markets tend to allocate resources to their
most valued uses
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David L. Chicoine - Academic articles
1 *Chicoine, David L., Steven C. Deller, [http://pfr.sagepub.com/content/21/1/
100.short Representative Versus Direct Democracy: A Test of Allocative Efficiency in Local
Government Expenditures], Public Finance Review, Vol. 21, No. 1,
January 1993.
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