Which is most important productive or allocative efficiency? Social efficiency makes a point of taking into account all externalities so we can try and equate social marginal benefit and social marginal cost. Related to allocative efficiency is the concept of social efficiency. Monopolies are often said to be allocatively inefficient because they are able to set the price higher than marginal cost.Allocative efficiency occurs where price = marginal cost (MC).Allocative efficiency will occur at an output when marginal benefit (price) = marginal cost. Allocative Efficiency definitionĪllocative efficiency is quite different and is more concerned with the distribution and allocation of resources in society.Īllocative efficiency looks at the marginal benefit of consumption compared to the marginal cost. using the minimum combination of labour and capital to produce a certain quantity of goods. Technical efficiency specifically refers to the optimal combination of inputs, i.e. Related to productive efficiency is the concept of technical efficiency.

producing at the lowest point of SRAC curve) But if can also refer to producing at the lowest point on the Long Run Average Cost curve LRAC i.e. Usually, productive efficiency refers to the short run (i.e. Productive efficiency also involves producing at the lowest point of the short run average cost curve (where MC cuts the bottom of the SRAC curve.) Point D in the graph is productively inefficient because you can produce more goods or services without an opportunity cost. In the diagram below, if you are at point A, you can’t produce more services without foregoing goods.

On the PPF curve, it is impossible to produce more of one good without producing less of another. Productive efficiency is said to occur on the production possibility frontier. This is defined as producing goods and services for the lowest cost. Allocative efficiency is concerned with the optimal distribution of goods and services.Įxample: An economy could be productively efficient in producing large numbers of boots – but if they were all for the left foot, it would be allocatively inefficient as no one would benefit from these low production costs.Productive efficiency is concerned with the optimal method of producing goods producing goods at the lowest cost.

Technical monopoly examples