Efficiency and market failure
Types of efficiency
- productive efficiency — lowest possible cost (fewest resources).
- allocative efficiency — making what people most want, where price = marginal cost.
- Pareto optimality — no one can gain without someone else losing.
- dynamic efficiency — improving over time (new technology, better products).
Practice
Allocative efficiency is achieved where:
Allocative efficiency (making what people most want) occurs where price = marginal cost.
Practice
Productive efficiency means producing at the:
Productive efficiency uses the fewest resources — the lowest cost per unit.
Market failure
- Market failure = the free market does not reach an efficient result. Main causes:
- monopoly power,
- externalities,
- public goods,
- information failure,
- factor immobility (factors can't move to where they're needed).
Practice
Which are causes of market failure? (Choose all that apply.)
Externalities, public goods, monopoly power, information failure and factor immobility cause market failure.
You've got it
Key idea
- productive (lowest cost), allocative (price = MC), dynamic (improving), Pareto (no costless gain)
- market failure = inefficient outcome
- causes: monopoly, externalities, public goods, information failure, factor immobility