Compare and contrast the various types of
economic efficiencies. [10]
The
fundamental economic problem is a problem of scarcity, necessitating choice.
This is because human wants are potentially unlimited, but resources are
limited, and hence choices have to be made, “efficiently”, between competing
uses for the same resources. The scarce resources, or factors of production,
are land, labour, capital, and entrepreneurship. Land refers to resources,
gifts of nature, and other natural factors. Labour refers to human effort and
work. Capital refers to any good that can be used to produced another good.
Entrepreneurship refers to risk-taking, organisation, and business acumen,
among other things. It can be said that efficiency is concerned with the optimal
production and distribution of society’s scarce resources. This economics essay
compares and contrasts the various main types of economic efficiencies –
productive efficiency, allocative efficiency, dynamic and static efficiency,
X-inefficiency, social efficiency, and Pareto efficiency.
Productive Efficiency
First,
productive efficiency occurs when the maximum number of goods and services are
produced with a given amount of inputs. This will occur on the production
possibilities curve or production possibilities frontier (PPC or PPF), meaning
that any point along the PPC will be productively efficient. On the PPC, it is
impossible to produce more goods without producing fewer services. Productive
efficiency will also occur at the lowest point on individual firms’ average
cost curves (AC curves). This is because productive efficiency can be thought
of as the method of least cost production, which means that production costs
are minimised. Productive efficiency is not the same as the other types of
efficiencies.
Think: how would you draw the PPC?
Allocative Efficiency
Second,
allocative efficiency occurs when goods and services are distributed according
to society’s preferences or when they are allocated in accordance with
maximising society’s welfare. An economy could be productively efficient but produce
goods that people that do not need, and this would be allocatively inefficient.
In other words, allocative efficiency is a subset of productive efficiency,
where productive efficiency is a necessary condition of allocative
efficiency. (A necessary condition is a condition for some state of affairs
that must be satisfied before the state of affairs can be obtained.) It should
be noted that allocative efficiency occurs when the price of the good produced
by a firm equals the marginal costs of production.
Dynamic Efficiency
Third,
dynamic efficiency refers to efficiency over time, whereas static efficiency
refers to efficiency at a particular point in time. The first concept has the
element of time taken into consideration whereas the other does not consider
time. Dynamic efficiency involves the introduction of new technology and
working practices to reduce costs over time, whereas static means “at a fixed
point in time”. Basically, this concept of dynamic means that there are changes
over time whereas static means that time is held, as it were, frozen.
X-inefficiency
Fourth,
X-inefficiency occurs when firms do not have incentives to cut costs. This is
usually associated with monopolies, which usually pursue rent-seeking behaviour
rather than think of how to lower costs. For instance, a monopoly which makes
supernormal profits may have little incentive to get rid of surplus labour.
Therefore, a monopolistic firm’s average costs may be higher than necessary.
Social Efficiency
Social
efficiency occurs when externalities are taken into consideration and occurs at
an output where the social cost of production (SMC) = the social benefit (SMB),
or alternatively, the marginal social costs (MSC) = the marginal social benefits
(MSB). This is closely related to both the concepts of allocative and Pareto
efficiency, also known as Pareto optimality. Pareto efficiency or optimality is
defined as a situation where it is not possible to make one party better off
without making another party worse off. Hence, Pareto efficiency is socially
efficient and also allocatively efficient, at society’s level.
Conclusion
In
conclusion, there are many efficiency concepts in Economics and it is important to
understand economic efficiency. Many of the concepts are related and can be
understood in relation to each other.
JC Economics Essays – Tutor’s Commentary: This is a good
introduction to the various “efficiencies” that Economics has to offer, not
just at ‘A’ levels, but also at O, AS levels and introductory undergraduate
Economics as well. ‘A’ level Economics can be quite esoteric, it is true, and this Economics material might seem difficult. Think
positively instead: how could you make this Economics essay comprehensible and
easily understood by you? Let’s do some counterfactual experiments here. Put
yourself in the role of the Economic tutor, the examiner, or the lecturer, and you were
marking this essay paper. If you were an Economics tutor, how would you judge
this essay? What were its strengths and weaknesses, and why do you think – as a
professional Economics tutor – those parts of the Economics essay were
strengths or weaknesses? Thanks for reading, all the best and good luck!
