Efficiency and market failure

• Productive efficiency


  This occurs when firms produce at the lowest possible cost and producing the maximum output possible
• Allocative efficiency


  This occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences. Price equals the Marginal Cost (MC) of production
• Pareto optimality


  occurs when it is impossible to make someone better off without making someone else worse off. Pareto optimality represents the best possible situation in the circumstances, with resources allocated in the most efficient way.
• dynamic efficiency

  Dynamic efficiency is concerned with the productive efficiency of a firm over a period of time. A firm which is dynamically efficient will be reducing its cost curves by implementing new production processes. Dynamic efficiency will enable a reduction in both SRAC and LRAC.
• Factors that affect dynamic efficiency

  • Investment – investment in new technology and improved capital can enable lower costs in future
  • State of technology. The rapid development of technology can enable firms to produce more for lower costs.
  • The motivation of workers and managers – do managers have incentives to take risks and innovate or is the structure of the firm set up to encourage stagnant development?
  • Access to finance. A firm without access to finance will struggle to invest in new capital which will enable lower costs.
• Market failure 


  market failure is when a free market fails to make the optimum use of scarce resources due to no government intervention. it is when a markets interaction between supply and demand does not lead to a productive or allocative efficiency