3.4.1 Efficiency

• Allocative efficiency

  It occurs when resources are allocated in a way that maximises overall societal welfare or utility

  
  

  In a perfectly competitive market, allocative efficiency is achieved when P = MC or AR = MC

  
  

  P = AC (0/normal profit)

  
  

  The market is producing the quantity of the good that maximises consumer and producer surplus.
• Productive Efficiency

  Its achieved when a firm or an economy produces goods and services at the lowest possible cost

  
  

  Resources are being used efficiently to minimise production costs

  
  

  In competitive markets, productive efficiency is realized when firms produce at the minimum point of their average cost curve (AC = MC).
• Dynamic Efficiency

  It refers to the ability of an economy to innovate and adapt over time

  
  

  It involves the long-term competitiveness and growth potential of an economy

  
  

  Its linked to innovation, technological progress, and the ability to adapt to changing circumstances
• X-Inefficiency

  It occurs when a firm is not operating at its lowest possible cost, even in the absence of competitive pressures

  
  

  It can arise due to factors such as poor management, lack of motivation, or the absence of competition

  
  

  It can persist in markets where firms have market power
• Efficiency/Inefficiency in Different Market Structures - Perfect competition

  In a perfectly competitive market, allocative and productive efficiency are typically achieved because firms are price takers and have no market power

  
  

  Resources are allocated efficiently, and firms produce at minimum cost
• Efficiency/Inefficiency in Different Market Structures - Monopoly

  Monopolies often lead to allocative inefficiency because they can set prices above marginal cost, resulting in deadweight loss

  
  

  A monopoly can be productively efficient if it operates at the minimum point of its average cost curve.
• Efficiency/Inefficiency in Different Market Structures - Monopolistic competition

  Firms may not achieve allocative efficiency because they have some degree of market power, but they compete on product differentiation

  
  

  Productive efficiency may not be fully realised either, as firms may operate at less than minimum average cost due to product differentiation
• Efficiency/Inefficiency in Different Market Structures - Oligopoly

  Oligopolistic firms can engage in price competition, leading to allocative inefficiency

  
  

  However, they may invest in research and development, contributing to dynamic efficiency

  
  

  Whether productive efficiency is achieved depends on the specific industry
• Efficiency/Inefficiency in Different Market Structures - Mixed or Regulated Markets

  In some industries, governments may intervene to promote allocative and productive efficiency through regulations, subsidies, or antitrust policies
• Different types of market efficiency

  1. productive – producing for the lowest cost.

  2) Allocative – distributing resources according to consumer preference P=MC

  3) Dynamic – Efficiency over time

  4) X-efficiency – incentives to cut costs

  5) Efficiency of scale – taking advantage of economies of scale

  6) Social efficiency – taking into account external costs/benefits

  7) Static efficiency - maximising output and minimising costs using the current resources and technology (short term efficiency)