Question

Compare and contrast allocative inefficiency and productive inefficiency.

Answer 1

The allocative and productive efficiencies are two different concepts. The basic differences between the two are:

1. Allocative efficiency is related to the allocation of goods and services where the marginal benefit (MB) is equal to marginal cost (MC or price). Productive efficiency is related to production of goods and services with fuller utilization of resources at the lowest cost.

2. The allocative efficiency is indicated on the marginal cost curve where the price charged by the firm must be equal to the marginal cost of the firm. Productive efficiency is indicated on the PPF and ATC curve. When the economy is productively efficient, it will produce on the PPF. When it produces below the PPF, there are unutilized resources and the economy is not productively efficient. When the economy is at productive efficiency the firms choose to produce at the lowest point of ATC curve.

3. Allocative efficiency ensures maximum social welfare where the consumers’ welfare and producers’ welfare are maximized. Productive efficiency ensures fuller utilization of available resource where it impossible to increase the production of one goods without reducing the other.

4. Allocative efficiency is concerned with the maximization of social welfare whereas the productive efficiency is concerned with the economic growth.

5. The allocative and productive efficiencies can be achieved in a perfect competitive market. But an imperfect competitive market never gives allocative and productive efficiencies where the firms charge a price above the marginal cost and produce at the early portion of the ATC curve.