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Chapter 1: Problem 11

Would you expect a centrally planned economy to be better at productive efficiency or allocative efficiency? Be sure to define productive efficiency and allocative efficiency in your answer.

Short Answer

Expert verified
In a centrally planned economy, it can be easier to achieve productive efficiency given total control of resource allocation. However, achieving allocative efficiency is generally more challenging due to the lack of market signals that accurately reflect consumer preferences.

Step by step solution

01

Define Productive Efficiency

Productive efficiency occurs when a good or service is produced at the lowest possible cost. This involves producing an output using the least amount of inputs. It results in cost-effectiveness and optimal use of resources.
02

Define Allocative Efficiency

Allocative efficiency is a state of the economy in which production represents consumer preferences. In particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
03

Explain Efficiency in a Centrally Planned Economy

In a centrally planned economy, decisions about what, when, and how much to produce are made by the government, rather than by individual producers and consumers in markets. This system may achieve productive efficiency to a certain extent because the government can allocate resources to minimize costs.
04

Discuss Possibility of Allocative Efficiency

However, a centrally planned economy might find it challenging to achieve allocative efficiency. In such an economy, the central authority makes decisions about what to produce, often influenced by political or societal factors, and these decisions may not reflect consumer preferences accurately.

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