Good Example Of Essay On Define Allocative Efficiency.

Explain the Significance of This Concept in Economics?

Allocative efficiency is a type of economic efficiency when manufacturer produces the service or product which is in high demand and desirable, society needs this product and ready to pay for it in the quantity they desire. Economy can be productively efficient but produce the goods in no need for people, it is called allocative inefficiency. Allocative efficiency is reached if a goods or service’s marginal benefit is equal to its Marginal Cost (i.e. Price = Marginal Cost). It is the point where supply (Marginal Cost) and demand (Marginal Benefit) curves cross each other. It is the point at which and producers and consumers are on welfare. Especially this concept is effective in free market which is perfectly competitive while monopoly can increase Price over the Marginal Cost of production. This is inefficient because Price is greater than Marginal Cost.
The concept of allocative efficiency is widely used by financials, agriculture managers, and manufacturers as well as by economists and business managers as it allows finding out the optimal combination of inputs so that output can be produced at minimal cost (Badunenko, 2008). In addition it gives an opportunity to increase profits by simply reallocating resources and it is important for the analysis of the production process. Using scarce resource as well as possible is the main factor to maximize profit for businesses. Kumbhakar and Wang (2006) state that the concept is effective to estimate the bias of cost inefficiency, input price elasticity, the cost function parameters and returns to scale. These analyses keep markets from deficits and surplus of produced goods and services and regulate optimal price for both manufacturer and society promoting economic growth.
Being allocationally efficient requires being informationally efficient, particularly in the context of prices and markets, and transactionally efficient as well (Reiter, n.a). To calculate allocative efficiency the input prices are required but Budanenko (2008) proposed a new approach of measuring allocative efficiency without information on input prices instead with the
information on input and output quantities and on profit. He explains that the estimation of technical efficiency is required as the first step; second is profit-technical efficiency estimation. It explains that economy will do its best to satisfy everlasting wants and needs with limited sources if technical efficiency is achieved first. So, to achieve allocative efficiency the economy must first reach technical efficiency because only by minimizing waste in the production process it is successfully possible to offer a competitive price.
In brief reasonably using scarce resource as well as possible to provide goods and services to meet unlimited needs of people at price equal to marginal cost is the main condition of achieving allocative efficiency.

Reference

Badunenko, O., Fritsch, M., Stephan, A. (2008). Allocative efficiency measurement revisited – Do we really need input prices? Elsevier  ISSN 0264-9993. Economic Modelling. Science Direct. 1093-1109. Available at https://www.econbiz.de/Record/allocative-efficiency-measurement-revisited-do-we-really-need-input-prices-badunenko-oleg/10003800756
Kumbhakar, S.C., Wang, H.-J., 2006. Pitfalls in the estimation of a cost function that ignores allocative inefficiency: a Monte Carlo analysis. Journal of Econometrics 134 (2), 317–340
Reiter, S., (n.a) Efficient allocation. Analysis of efficiency in the context of resource allocation. Available at http://bactra.org/reviews/future-for-socialism/efficient-allocation.pdf