Question

How is a company that builds a high speed train that goes from one state to another an example of allocative efficiency?

Answer 1

The concept of allocative efficiency arise from the fact, that some producers within an economy engage in production of such products in which the marginal benefit to the consumer is equal to the marginal cost of production of the product itself.

In this case, the company is building a high speed train which will transport people from one place to another. In the production, materials would be required such as iron and steel, seats, glass etc. Further there also would be significant investment in research and development and also of manufacturing and engineering staff which would be producing the final product as such.

Allocative efficiency in this case is achieved due to the additional benefit which the consumers would get by consuming the product or service. A faster train would mean easier commute for people which in turn would add value to both the consumers in terms of the time they spend, and to the economy as whole which earns taxes and reduces stress on land in a particular state only.

For example, in Japan people use high speed trains on a daily basis for transport. This allows them to use the land resources much effectively which are already scarce in nature.

Since the costs of such a product, way exceeds the costs it is said to be an example of allocative efficiency.

Please feel free to ask your doubts in the comments section if any.