Question

1) Define productive efficiency. Does productive efficiency imply allocative efficiency? Explain. Productive efficiency is a situation in which the economy could not produce any more of one good without sacrificing production of another good. In other words, productive efficiency occurs when a good or a service is produced at the lowest possible cost. Productive efficiency can be defined as producing goods and services for the lowest cost. Productive efficiency does not imply allocative efficiency because a firm or an industry may be productively efficient and produce the goods efficiently but if the goods are not allocated properly ie if allocative efficiency is not achieved, then there won't be any point in being productively efficient. Hence, being productively efficient helps in the allocative efficiency but it does not imply allocative efficiency. They are different. I need to have 350 words can you help me add additional information?

Answer 1

When a producer successfully minimizes the wastage of resources used in production , then productive efficiency is achieved . So when a firm is operating on the lowest point of its average cost curve , it is said to be productively efficient . Now we come to efficiency point from the whole economy perspective . When an economy is production on its production possibility frontier ( PPF ) then it is using all its resources to the fullest . So any point on the PPF is productively efficient . On the PPF an economy can produce more of one good only by reducing the production of another good . So it can be easily said that on the PPF no resource is left unutilized .

Now we come to allocative efficiency , which is also called Pareto efficiency . It occurs when the reservation price of consumers is equal to the cost of resources or factors of production . So the main condition for allocative efficiency is when market price equals marginal cost .

Here lies the difference between productive and allocative efficiency . All points of the PPF can be called productively efficient as we saw earlier , but only one point is allocatively efficient . This is the point where marginal cost is equal to market price . So in allocative efficieny the allocation occurs as per consumer demand and needs . Hence productive efficiency leads to allocative efficiency but does not imply it . It is a necessary factor but not a sufficient one .