Question:
Allocative efficiency is an economic concept that occurs when the output of production is as close as possible to the marginal cost. In this case, the price the consumers are willing to pay is almost equal to the marginal utility they derive from the good or the service.
Productive efficiency is concerned with producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost. To be productively efficient means the economy must be producing on its production possibility frontier.
Required
Briefly discuss the difference between these two concepts.
A) Perfect competition results in productive efficiency but not necessarily allocative efficiency.
B) Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.
C) Productive efficiency results in zero economic profits but allocative efficiency does not.
D) Perfect competition results in allocative efficiency but not necessarily productive efficiency.
E) Economic surplus is maximised with productive efficiency but not necessarily with allocative efficiency.
Answer:
The correct answer is E
Explanation:
Economic efficiency refers to a situation where all goods and factors of production in an economy are distributed or allocated to their most valuable use with little or no waste.
Economic efficiency is maximized when price (P) from selling the product is equal to marginal cost (MC) of producing it:
P = MC
When price (P) is equal to marginal revenue (MR), both profit and efficiency are maximized.
Caption:
Max Profit = Max Efficiency
When P = MR = MC
Whether price is equal to marginal revenue or not depends on how pricing is done.
Cheers!
