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3) In this class we have discussed two types of efficiency: allocative efficiency and productive efficiency. This question is

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3.

a.

Ans: Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.

Under market system, it is that point where deadweight loss is zero and total surplus is maximized.

That point is: P = MC

b.

Ans: Productive efficiency is concerned with producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost. To be productively efficient means the economy must be producing on its production possibility frontier.

At firm's level, productive efficiency is given by point, where output is produced at minimum of average cost.

c.

Yes, there can exist gains or costs which are not included in these two definitions.

Examples:

  • Cost: Pollution emerged from transportation of milk using vehicles.
  • Cost: Value of pain of animals used roughly under dairy market.

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