Economics Welfare Economics Questions
The conditions for allocative efficiency are as follows:
1. Marginal benefit equals marginal cost: Allocative efficiency occurs when the last unit of a good or service consumed provides the same level of benefit as the cost of producing it. In other words, the allocation of resources is efficient when the additional benefit gained from consuming one more unit is equal to the additional cost of producing it.
2. Pareto efficiency: Allocative efficiency is achieved when it is not possible to make any individual better off without making someone else worse off. This means that resources are allocated in a way that maximizes overall societal welfare, where no one can be made better off without making someone else worse off.
3. Perfect competition: Allocative efficiency is more likely to be achieved in a perfectly competitive market where there are many buyers and sellers, and no single entity has the power to influence prices. In such a market, prices reflect the true costs and benefits of production, leading to an efficient allocation of resources.
4. No externalities: Allocative efficiency is hindered by the presence of externalities, which are costs or benefits that are not reflected in the market price. When externalities exist, the market fails to allocate resources efficiently, as the true costs or benefits of production are not fully considered.
Overall, allocative efficiency is achieved when resources are allocated in a way that maximizes societal welfare, where the marginal benefit equals the marginal cost, Pareto efficiency is achieved, perfect competition exists, and there are no externalities.