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Explain what is meant by allocative and productive efficiency and briefly comment on whether these efficiencies can be achieved in the real world.
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Explain what is meant by allocative and productive efficiency and briefly comment on whether these efficiencies can be achieved in the real world. The three questions that have to be answered when trying to measure the efficiency of an economy are 'what?', 'how?', and 'for whom?'. The first question relates to the production of goods. We have scarce resources so to achieve maximum efficiency we must make sure those resources are being used to make things that people want. Otherwise, precious resources are being mis-allocated. The second factor of efficiency is the competence of the production method itself. Is output being maximised? The third question is 'for whom?'. This relates to financial inequalities which exist in our society. If everyone earned the same, then output could not be maximised because there would be no incentives to work hard. I will be discussing the first two factors above. The first question links with...
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