A nation may or may not achieve
productive efficiency and allocative efficiency simultaneously. Why is that the
case?
Economic efficiency
Efficiency is achieved if scarce
resources are successfully combined in such a way, to produce only those products
that are highly valued at the greatest amount using the least cost method. The idea
of efficiency can be further divided into two and they are productive
efficiency and allocative efficiency
Productive efficiency
This concept can be viewed from both
microeconomic and macroeconomic perspectives. In the former, we always say that
a firm is being productively efficient if it is able to produce at the level of
output where AC is at its lowest. Mathematically, we can also write this as MC
= AC. Why is that so? The answer is very simple. The MC curve will always cut
the AC curve from its minimum and hence the relationship is established in such
a way
From macroeconomic angle, we can
actually use the PPC to reflect the idea of productive efficiency. A nation is
said to be productively efficient if it is already operating along the boundary
of its PPC. There are no wastages in the economy e.g. unemployment and idle
machinery and all resources have been fully and efficiently utilised. By stretching
the usage of all resources to the their potential, a country will be able to
land on its frontier
Allocative efficiency
Again, in the same way, we can view
the concept of allocative efficiency via both microeconomic and macroeconomic
angles. The former can be attained if a firm operates at the level of output
where P = MC. It is worth nothing the identity of P = MB = MU. In fact, they
are all the same. Why? The price that consumers place on a product is actually
the benefit or the satisfaction that they think they can get from using it. If
a customer values the consumption of a particular output, he or she will be prepared
to pay a price that justifies their preference. Would you be willing to pay MYR
2,000,000 for a second-hand car? You know the answer. But, if I change the
subject to Lamborghini Aventador 6.5, then you would most likely say yes and
perhaps willing to pay more (if you can afford to do so) because the market
price of this car in Malaysia is around MYR 2.8 million. You are willing to pay
such a high price because you feel that the benefits worth that much. That is
why, a product is allocative efficient if P = MC or MB = MC. The price that people
are willing and able to pay reflects the costs of producing it
From macroeconomic angle, allocative
efficiency is attained if an economy is operating along the boundary of its
PPC. Resources have been combined in such a way to produce the highest level of
output which is valued by the consumers
Achieve both simultaneously
An economy is able to become both productively
and allocatively efficient upon the condition that resources have been gathered
to produce the maximum number of output using the least cost method where all the
products are actually what the people want. Interestingly, all the points on
the PPC are productively efficient. However, there can only be one point which
can be regarded as allocatively efficient. It represents the combination of two
goods which is most optimal/ preferred
Not possible to achieve both
simultaneously
It is also possible that an economy
can actually achieve one without the other. Think about North Korea. Think
about the famous famine which took place somewhere between 1994 and 1998. It
was a period that no one can ever forget. Millions of North Koreans died of
hunger. The communist/ socialist government under the leadership of Kim Jong-Il
particularly operated by the principle of ‘Songun’ or more commonly known as
military-first policy. This seems to be somewhat antithesis because in a
command economy, it should be people’s interest that comes first. What happen
was, the military sector continued to get more attention e.g. weapons and
nuclear technology. The economy as a whole may be productively efficient but
definitely not allocative efficient. Scarce resources are not devoted towards
what the people wanted and value the most-food products, healthcare, education
and other modern infrastructure
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