What is Resource Allocation?
- Depending on the price, suppliers will set aside more or less resources towards producing specific amounts of a good.
Allocative Efficiency
- Ideal combination of goods and services in a society.
- The market is socially efficient with no external influences and no external affects.
- Optimum Allocation = optimum distribution of resources.
- Results in the maximum possible total surplus at equilibrium (Qs = Qd)
- Allocative efficiency naturally occurs in a free market, as consumers demand the things they want and need, which suppliers respond to but allocating resources towards demanded goods.
- However, the government might intervene in natural procedures, as some goods, such as drugs or weapons, might have high demand, but be harmful for society.
Failure of Allocative Efficiency
- Failure to reach allocative efficiency results in a welfare loss.
- Not producing where Qs = Qd, meaning that there is a surplus lost.