Efficiency and market failure

What is economic efficiency?

Where scarce resources are used in the most efficient way to produce maximum output

Define productive efficiency and give the conditions

When a firm is producing at the lowest possible cost

Define allocative efficiency and give the conditions

Where the price level is equal to marginal cost; firms are producing those goods and services most wanted by consumers

Conditions: Price has to equal marginal costs

What is pareto optimality?

Where it is impossible to make someone better off without making someone else worse off

What is dynamic efficiency?

When resources are allocated efficiently over time

Conditions: It happens over time and is linked to the pace of innovation

You can’t make one generation better without making another worse

Improvement in range of choice for consumers

Performance and quality of products

Define the term marginal cost

The addition to total cost when making one extra unit of output

What is market failure? and give reasons for market failure

When a free market is left to its own devices and fails to make the best use of scarce resources

Reasons: Negative externalities, No provision of information, monopolies, merit and demerit goods