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Chapter 1: Problem 3

What is the difference between productive efficiency and allocative efficiency?

Short Answer

Expert verified
Productive efficiency refers to producing without waste, while allocative efficiency is about distributing the production based on consumer preference. The key difference lies in the focus - productive efficiency focuses on avoiding waste during production, while allocative efficiency is about ensuring the goods and services produced match what customers want.

Step by step solution

01

Define Productive Efficiency

Productive efficiency is a situation where the economy is leveraging its resources to maximum capacity. That is, goods and services are being produced in the most cost-effective way, and any changes made to assist one person would harm another.
02

Define Allocative Efficiency

Allocative efficiency, on the other hand, occurs when the goods and services are distributed according to consumer preferences. That is, resources are allocated in such a way that consumer satisfaction is maximized.
03

Differentiate between Productive and Allocative Efficiency

The key difference between productive and allocative efficiency lies in the approach: the former focuses on utilizing resources to their maximum capacity without waste, whereas the latter focuses on the distribution of goods and services according to consumer demands. Efficient production does not necessarily lead to allocation efficiency.

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Most popular questions from this chapter

The Apply the Concept feature explains that there are both positive and normative aspects to the debate over whether the federal government should enact tariffs on imports of cars from Mexico. What economic statistics would be most useful in evaluating the positive elements in this debate? Assuming that these statistics are available or could be gathered, are they likely to resolve the normative issues in this debate?

In a market economy, why does a firm have a strong incentive to be productively efficient and allocatively efficient? What does the firm earn if it is productively and allocatively efficient, and what happens if it is not?

The Food and Drug Administration (FDA) is part of the federal government's Department of Health and Human Services. Among its other functions, the FDA evaluates the safety and effectiveness of drugs and medical devices. FDA approval had to be granted before OraSure was allowed to market its home HIV test. In a centrally planned economy, the government decides how resources will be allocated. In a market economy, the decisions of households and firms interacting in markets allocate resources. Briefly explain which statement is more accurate: (a) The regulation of the production and sale of drugs and medical devices in the United States is an example of how resources are allocated in a centrally planned economy, or (b) the regulation of the production and sale of drugs and medical devices in the United States is an example of how resources are allocated in a market economy.

Suppose that your college decides to give away 1,000 tickets to the football game against your school's biggest rival. The athletic department elects to distribute the tickets by giving them away to the first 1,000 students who show up at the department's office at 10 A.M. the following Monday. a. Which groups of students will be most likely to try to get the tickets? Think of specific examples and then generalize. b. What is the opportunity cost to students of distributing the tickets this way? c. Productive efficiency occurs when a good or service (such as the distribution of tickets) is produced at the lowest possible cost. Is this an efficient way to distribute the tickets? If possible, think of a more efficient method of distributing the tickets. d. Is this an equitable way to distribute the tickets? Briefly explain.

Briefly explain whether each of the following is primarily a microeconomic issue or a macroeconomic issue. a. The effect of higher cigarette taxes on the quantity of cigarettes sold b. The effect of higher income taxes on the total amount of consumer spending c. The reasons the economies of East Asian countries grow faster than the economies of sub-Saharan African countries d. The reasons for low rates of profit in the airline industry
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