Efficiency and market failure
| English | Chinese | Pinyin |
|---|---|---|
| allocative efficiency | 配置效率 | pèi zhì xiào lǜ |
| marginal cost | 边际成本 | biān jì chéng běn |
| productive efficiency | 生产效率 | shēng chǎn xiào lǜ |
| average cost | 平均成本 | píng jūn chéng běn |
| Pareto efficiency | 帕累托效率 | pà lèi tuō xiào lǜ |
| deadweight loss | 无谓损失 | wú wèi sǔn shī |
What "efficient" really means
- "Efficient" is one of the most-used — and most-misused — words in economics.
- It has two precise meanings, and a market that misses either is failing.
Allocative efficiency occurs where:
P = MC means the value of the last unit equals its cost — allocatively efficient.
Allocative efficiency is where price equals marginal ______.
P = MC.
Allocative efficiency 配置效率
- Allocative efficiency: resources go to what society values most — output where price = marginal cost 边际成本 (P = MC).
- At this point, the value of the last unit equals its cost — no reallocation could make society better off.
In perfect competition price equals marginal cost (P = MC) — the condition for allocative efficiency
Allocative efficiency
The market is allocatively efficient where supply meets demand — price equals marginal cost. Market failure pushes it away from that point.
Productive efficiency is achieved at the:
Lowest cost per unit = the minimum point of AC.
A Pareto-efficient allocation is one where no one can be made better off without making someone worse off.
That is the definition of Pareto efficiency.
On a PPF, efficiency requires producing:
Producing on the curve uses all resources efficiently; inside is wasteful.
Productive efficiency 生产效率
- Productive efficiency: goods are made at the lowest possible cost — producing at the minimum of the average cost 平均成本 curve.
- On a PPF, both efficiencies require producing on the frontier, not inside it.
Pareto efficiency 帕累托效率. An allocation is Pareto efficient if you can't make anyone better off without making someone else worse off — the benchmark for "no waste".
When markets fail
- Markets fail to reach these efficiencies because of externalities, public goods, market power and information gaps.
- The result: too much or too little produced, and a deadweight loss 无谓损失 of welfare.
You've got it
- allocative efficiency: P = MC (resources match what society values)
- productive efficiency: lowest cost (minimum of AC); both need producing on the PPF
- market failure (externalities, public goods, monopoly, info gaps) breaks efficiency → deadweight loss