TOPIC: ECONOMIC WELFARE
Efficient Resource Allocation: Pareto Optimally
Efficiency implies both productive and allocative efficiency.
Economic wellbeing refers to the state of contentment achieved by the overall economy from the production and consumption of goods and services.
Pareto Efficiency – this is a concept related to opportunity cost. A situation is Pareto Efficient (Pareto Optimal) if it is not possible to make someone better off without making someone else worse off. Pareto efficiency is said to occur when it is impossible to make one party better off without making someone worse off.
A Pareto improvement is said to occur when at least one individual becomes better off without anyone becoming worse off.
Production efficiency – occurs when the largest quantity of goods and services is produced from a given amount of input. This is achieved when the firm produces at its lowest average total cost. Productive efficiency occurs when the economy is getting maximum output from its resources. 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).
Points A and B are productively efficient.
Point C is inefficient because you could produce more goods or services with no opportunity cost
A firm is said to be productively efficient when it is producing at the lowest point on the average cost curve (where Marginal cost meets average cost).
Productive efficiency occurs where MC = AC or at the lowest point along the firm’s long run average cost curve or SRAC (short run average cost curve).
Allocative efficiency – is achieved when the marginal cost of production is equal to the market price of the commodity (MC=P). When resources are directed to production such that optimal output of goods and services are generated. This occurs when there is an optimal distribution...