Efficiency & Market Failure (A Level Economics)

Vocabulary practice flashcards covering productive, allocative, Pareto, dynamic, and global economic efficiency, along with the fundamentals and causes of market failure.

Economic Efficiency

The optimal use of scarce resources, which involves producing the right goods at the lowest possible cost through productive and allocative efficiency.

Productive Efficiency

A condition achieved when firms produce at the lowest possible average cost, occurring at the minimum point of the average cost curve where $MC = AC$ (and at the minimum point of the LRAC curve in the long run).

Allocative Efficiency

A condition achieved when output reflects consumer preferences and social welfare is maximised, occurring where price equals marginal cost ($P = MC$) or $AR = MC$.

Welfare Loss (Deadweight Loss)

The loss in social welfare that arises when market price does not equal marginal cost ($P \neq MC$), indicating allocative inefficiency.

Technical Efficiency

Another term for productive efficiency, describing a production state of lowest possible cost with no waste of scarce resources.

Welfare Efficiency

Another term for allocative efficiency, describing a production state where the right goods are produced to maximise social welfare.

Global Economic Efficiency

The state reached when resources across countries are allocated in the best possible way, often through international trade and countries specialising in what they produce most efficiently.

Pareto Efficiency (Pareto Optimality)

An allocation of resources where it is impossible to make one person better off without making someone else worse off, represented by any point on the frontier of a Production Possibility Curve (PPC).

Pareto Improvement

A reallocation of resources where at least one person is made better off without making anyone else worse off.

Dynamic Efficiency

Improvements in productive efficiency occurring over time as a firm innovates and reinvests profits into research, development, new technology, or training, shifting the LRAC curve downwards.

Market Failure

A situation where the free market fails to allocate scarce resources efficiently, resulting in a level of output that does not maximise social welfare.

Demerit Goods

Harmful goods or services that are over-provided in a free market, leading to an over-allocation of the factors of production used to make them (e.g., cigarettes).

Merit Goods

Beneficial goods or services that are under-provided in a free market, leading to an under-allocation of the factors of production used to make them (e.g., education).

Common Pool Resources

Finite, shared resources that suffer from market failure due to overuse and overexploitation in an unregulated market.