Allocative efficiency – What it is, definition and concept

The allocative efficiency is the situation in which the factors of production in an economy are distributed in such a way that companies produce the goods and services that consumers demand. Plus, they’ll bring them to market at a price that will maximize the buyers’ profit.

That is, an economy with allocative efficiency is one in which resources are not only used optimally by companies, but the goods that are produced will satisfy consumers in the best way. That is, by assigning an “adequate” price that will maximize the utility of the applicants.

As we can see, allocative efficiency does not only refer to production efficiency. The latter means that producers minimize their costs, or that they use the fewest possible resources. That is, it focuses on the production methods used. Instead, allocative efficiency considers the benefit of the consumer market as a whole.

The allocative efficiency is important considering that the resources are limited. In addition, it takes into account not only the profit generated by companies, but also that obtained by consumers.

It is also necessary to point out that for the market to function efficiently, once the factors of production have been assigned, some important assumptions must be met. For example, there must be perfect information, that is, market agents must have all the information necessary to make the optimal decision.

Similarly, we are considering that there are no higher transaction costs, that is, additional costs that are required to carry out an exchange. For example, those search costs that a company would have to incur to find the right supplier.

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Likewise, we must remember that, in principle, efficiency is to achieve a goal using the fewest possible resources. In the economic sphere, a system is considered efficient when the distribution of resources is the best possible among the available options.

Allocative efficiency in the public sector

When analyzing production in the public sector, it is considered that there is allocative efficiency when costs are being minimized. Thus, the cheapest combination of factors of production is used.

Likewise, when there is allocative efficiency, there is also technical efficiency. This refers to the fact that they are working towards the production frontier. That is, no more can be produced without increasing the inputs or factors used. In this sense, it is understood that the best available technology is being used.

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