Question

1. Define the concept of optimal resource allocation. a. How does mainstream economic theory define the optimal allocation of resources in a society? b. Why would ecological economists argue that the mainline economic view of optimal resource allocation is not optimal but leads instead to societies making suboptimal decisions about how to allocate their resources. suggests that markets fail and policy must therefore correct the failures of the market.

Answer 1

Optimal resource allocation refers to such an allocation of resources of production such that net benefits to the society as a whole is maximized.

a) Mainstream economists argue that the resources in the economy must be so allocated that each resource is employed in sectors where the marginal productivity of the resource is greater than if employed in any other sector. The allocation is based on cost benefit analysis and the optimal amount of resources allocated in each society is thus decided.

b) Environmental economists criticise the mainstream theory of optimization of resources on the grounds that it ignores socioeconomic disparities and the damage done to the environment by these production activities. The market may not take into account the problems of pollution and displacement of plants, animals and marginalised communities from their habitats even when the resources are allocated according to cost benefit analysis. These drawbacks of the mainstream theory make them non optimal.