Paper 3 · market efficiency and government intervention
Allocative efficiency in an economy is achieved when...
Aa firm operating under weak competitive pressure fails to minimise its production costs, producing above the lowest feasible cost.
Bresources are distributed so that price equals marginal cost, meaning no reallocation could make one party better off without making another worse off.
Coutput is produced at the lowest point on the firm's long-run average cost curve, regardless of the price charged.
Dgovernment planners directly assign resources to industries according to a fixed national output plan, with prices playing no part in guiding what gets produced.
Explanation: Allocative efficiency is achieved when price equals marginal cost (P = MC), so resources are directed to their highest-valued use and no further reallocation could make one person better off without making someone else worse off. This differs from productive efficiency (the minimum point of the average cost curve) and from X-efficiency, which concerns whether a firm minimises costs given competitive pressure.
Derived from ZIMSEC Economics Paper 3, June 2009, Q1
