Ch32 Efficiency and market failure

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What is economic efficiency?

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Economic efficiency is achieved when scarce resources are used in the most efficient way to maximise output.

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What is productive efficiency?

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Productive efficiency occurs when a firm is producing at the lowest possible cost.

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What is allocative efficiency?

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Allocative efficiency occurs when firms are producing those goods and services most wanted by consumers. It is achieved when price is equal to marginal cost.

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What is Pareto optimality?

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Pareto optimality is achieved when it is impossible to make someone better off without making someone else worse off.

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What is dynamic efficiency?

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Dynamic efficiency is a long-run concept and is when resources are allocated efficiently over time.

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What is market failure?

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Market failure is a situation where the free market does not make the best allocation of scarce resources. Neither productive nor allocative efficiency is being achieved.

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What are examples of market failure?

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Typical examples of market failure are where a government provides public goods or finds it necessary because of information failure to provide merit goods and regulate the production and consumption of demerit goods.

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When is productive efficiency achieved?

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Productive efficiency is achieved when firms are producing at the lowest average cost.

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When is allocative efficiency achieved?

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Allocative efficiency is being achieved when price equals marginal cost.

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How can dynamic efficiency be achieved?

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Dynamic efficiency can be achieved through a higher long-term growth rate. The changing needs of the market lead to new production techniques and new technology benefiting consumers with lower prices and new products.