Q:

What is allocative efficieny and productive efficiency?

A:

Quick Answer

According to class resources from the Swarthmore College Computer Science Department, allocative efficiency occurs when scarce resources are allocated in a way that meets the desires of consumers. Productive efficiency occurs when resources are produced at the lowest possible cost. Economics deals with the conflict between scarce resources and unlimited human wants, and both forms of efficiency exist to mediate that conflict.

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Full Answer

Certain market structures either achieve or ignore these two efficiencies. According to class material from Fullerton College, firms in perfect competition achieve allocative efficiency when the price of the good equals the marginal cost of producing the good. Productive efficiency is achieved when price equals the minimum point on the average total cost curve.

According to BlacksAcademy.net, an educational resource, if a good is productively efficient, firms put more value on the consumers by lowering costs. Conversely, if it is allocatively efficient, consumers put more value on the good if current output does not meet their demands. Firms in non-perfect competition achieve neither of these goals. For example, Fullerton College states that a monopoly will have price above marginal cost and above average total cost, so both efficiencies are missed. According to Princeton University, a loss of economic efficiency is called a deadweight loss. Deadweight loss can result from monopoly pricing, tax impositions and price controls.

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