Question

Most economists would argue that efficiency is the a very important term in economics. Using related terms such as scarcity, allocation, etc., explain the importance of efficiency. Additionally, explain how the benefit of efficiency is not always supportive of equity.

Answer 1

Economists focus to find the solutions of economic problems. But, to solve these problems, resources are scarce and needs and wants are unlimited. Hence, it is important to allocate and utilize the resource so that utility is maximized. Once it is done, then efficiency is achieved. Hence, importance of efficiency is that it measures the ability of allocation to resources to maximize the output that delivers the maximum utilization.

Further, different markets have different level of competition, types of products and entry barriers. It also affects the efficiency level. In perfect competition, the firms achieve allocative and productive efficiency. The lowest level of efficiency is achieved in monopoly.

Benefits of the efficiency, means people who are efficient, are rewarded with higher wage and vice versa. It means that there is a difference, created by the efficiency where people are paid higher or lower wages on the basis of efficiency. It does not promote equity. Hence, it is said that efficiency does not promote equity.