Allocative Efficiency | Economics Help

Governments may subsidise petrol to correct the problem of under-production due to market dominance. Market dominance occurs when the firm or firms in a market have substantial market power which leads to under-production. An example of a firm with substantial market power is Microsoft Corporation in the market for PC operating systems. Market dominance occurs due to high barriers to entry in monopolistic and oligopolistic markets. To maximise profit, a firm with substantial market power restricts output and charges a price higher than its marginal cost resulting in under-production. In the case of monopoly, the demand for the good is likely to be price inelastic due to lack of close substitutes and hence the difference between the price and the marginal cost, which is a measure of the extent of allocative inefficiency, is likely to be large.

Definition of allocative efficiency

The concept of technical and allocative efficiency - …
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The concept of technical and allocative efficiency

Price of non-perfect competitive firms will exceed marginal cost, because price exceeds marginal revenue and the firms produce where marginal revenue (MR) and marginal cost are equal. Then the firms can charge the price that consumers will pay for that output level. Allocative efficiency is not achieved because price (what product is worth to consumers) is above marginal cost (opportunity cost of product). Ideally, output should expand to a level where P=MC, but this will occur only under pure competitive conditions where P = MR.

Productive vs allocative efficiency | Economics Help

Allocative efficiency is improved when technological advance involves a new product that increases the utility consumers can obtain from their limited income. Process innovation can lower production cost and improve productive efficiency. Innovation can create monopoly power through patents or the advantages of being first, reducing the benefit to society from the innovation. Innovation can also reduce or even disintegrate existing monopoly power by providing competition where there was none. In this case economic efficiency is enhanced because the competition drives prices down closer to marginal cost and minimum average total cost.

allocative efficiency Essay - 1003 Words - StudyMode
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Allocative Efficiency Essay - 435 Words - StudyMode

Students simply need to explain the market forces of demand and supply and why some governments subsidise petrol while others impose a tax on it with reference to the concepts of the market forces of demand and supply, allocative efficiency, negative externalities, tax revenue, market dominance and affordability. At the end of Chapter 7 Market Failure in , the Principal Economics Tutor, Mr. Edmund Quek, will engage in a more detailed discussion of the question with the students.

Technical Allocative And Economic Efficiency Thesis

This short video explains how to build a chain of reasoning to help explain how a firm operating in perfect competition will arrive at an equilibrium price and output that achieves allocative efficiency.

1 Answer to Contrast technical and allocative efficiency

Allocative efficiency is a state when the market equilibrium is at a price that represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of supply. Happens in a perfectly competitive market (MPB=MPC).