Allocative vs Productive Efficiency

Productive efficiency

It deals with how the firm produces. When firms produce at the lowest cost per unit ( $\min ATC$ ), it has productive efficiency.

Graph

x axis = $Q$ , y axis = $P$ . MC goes through the $\min ATC$ . This is the productive efficiency point. $MC < ATC$ pulls ATC down and $MC > ATC$ pushes it up, so MC crosses ATC at its minimum.

Allocative efficiency

It deals with how much is produㄴced.
P reflects how much consumers value the last unit. $MC$ is the resource cost. When $P = MC$ , the sum of consumer and producer surplus is maximized, so at this moment, it has the allocative efficiency.

Graph

x axis = $Q$ , y axis = $P$ . Consumer surplus: $\triangle$ $(0, D(0))$ , $(Q^{pc}, p^{pc})$ , $(0, p^{pc})$ Producer surplus: $\triangle$ $(0, S(0))$ , $(Q^{pc}, p^{pc})$ , $(0, p^{pc})$ The sum of consumer and producer surplus is maximized. If $Q$ is lower or bigger than $Q^{pc}$ , the total surplus decreases.

PC in the LR

In the long run, PC achieves both because $P = MC = \min ATC$ .

Efficiency $\ne$ Equity

The efficient allocation is not necessarily equitable. For example, a competitive electricity market can allocate electricity efficiently to consumers who are able to pay, while some low-income households remain unable to access the energy services. Therefore, policy has at least two objectives- 1) correct market failure 2) change distributional outcomes.

Links: Perfect Competition, Short-run and Long-run Equilibrium, Monopoly

Allocative vs Productive Efficiency

Productive efficiency

Allocative efficiency

Efficiency ≠\ne= Equity

Efficiency $\ne$ Equity