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Q. In 2001 in the UK a widespread disease among cattle and sheep closed off large parts of the countryside. The government decided to give aid to agriculture but not to tourism, both of which were badly affected. Comment on the government's actions in terms of allocative efficiency and equity. [ A Level 2003 Paper 4] Ans. Allocative efficiency occurs when resources are allocated to maximize the net benefit attained through their use. It occurs when consumers' demands are satisfied by using the resources to produce goods and services consumers want. It involves the choice of different points on the production possibility curve which shoes the combinations of goods and services that an economy can produce using its available resources. Once allocative efficiency and productive efficiency (where firms are producing at minimum average cost) is achieved and the two of them coincide, then Pareto optimality is achieved. Pareto optimality means that it is...

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