Question

When does advertising increase economic efficiency and when does it decrease economic efficiency? What does that mean for public policy?

Answer 1

Answer -

Part a) when advertising increase economic efficiency.

In a free economy advertising includes many functions like branding , communicating information ,Creating value and loyalty and decreasing the cost of sales.

It contributes to more economic growth through creating competetitve spirit among the producers of the country which facilitates Consumers variety of products which enable them to consume products as per their choice and budget and consumers can increase their standard of living.Advertisting resulted in to better production,better consumption,better marketing,better living standard ,it increases economic efficiency.

b) When does advertising decrease economic efficiency.

1.In most cases the most effective advertising is very costly. Sometimes it is based on misleading claims and if a consumer purchased the product based on this false claim,it resulted in to inefficiency and creates negative externality.

2.Advertising can easily offset by rival advertising and it creates no social values.

3.If advertising becomes very effective and attracts more customers in the market for certain brand or company products ,this firm can easily achieve monopoly power and it is detrimental to the interest of other competetitve firms in the market and it lowers social efficiency.

In this regard advertising have some positive and some negative impacts on public policy.If this benifited to people then it is good for public policy but if this advertising gives misleading information about products ,then it is not appropriate for the public policy.