allocative efficiency

Normally the market mechanism is good at allocating inputs, but there are occasions when the Efficiency is about a society making optimal use of scarce resources to satisfy wants and needs market can fail
Allocative efficiency is concerned with producing the goods and services that match the changing needs and preferences and which are placed the greatest value. Allocative efficiency is reached when no one can be made better off without making someone else worse off. This is known as pareto efficiency. Allocative Efficiency occurs when the value that value that consumers place on a good or services is equal the cost of the resources used up in production. This condition required for allocative efficiency is that when price is equal to marginal cost of supply , according to Gillespie, Allan (2007).
In the diagram below ,the market is in equilibrium at price P1 and output Q1. At this point, the total area of consumer and producer surplus is maximized.If for example ,suppliers were able to restrict output to Q2 and hike the market price up to P2, sellers would gain extra producer surplus by widening their profit margins, but there also would be an even greater loss of consumer surplus.Thus P2 is not an allocative efficient allocation of resources for this market whereas P1 ,the market equilibrium price is deemed to be allocative efficient ,according to Gillespie, Allan (2007)

Allocative efficient can be illustrated using a production possibility frontier (PPF). All points that lie on the (PPF) are allocatively efficient because we cannot produce more of one product without affecting the amount of all other products available.

In the diagram on the next page ,the combination of output shown by point A is allocatively efficient as at point B. At output combination C we can increase production of both goods by making fuller use of existing resources or increasing efficiency. Loss of economic efficiency is represented by C. Using the production possibility frontier to show allocative efficiency

Productive efficiency exists when producers minimize the wastage of resources in their production process. In the (PPF) from the previous page all points on the curve that is B and A are points of maximum productive efficiency. This means no more output of any good can be achieved from the given inputs without sacrificing output of some goods. All points inside the frointier such as A can be produced but are productively inefficient.

b) Discuss whether according to economic analysis, government intervention can lead to a more efficient use of resources.
The government may choose to intervene in the price mechanism largely on the grounds of wanting to change the allocation of resources and achieve what they perceive to be an improvement in economic and social welfare. All governments of every political persuasion intervene in the economy to influence the allocation of scarce resources among competing uses. The main reasons for government intervention are to correct for market failure, to achieve a more equitable distribution of income and wealth and improve the performance of the economy.

According to Chacholiacles, M (1986), government can intervene in through legislation and regulation. Parliament can pass laws that for example prohibit the sale of cigarettes to children or ban smoking in the workplace. The laws of competition policy act against examples of price fixing cartels or other forms of anti-competitive behavior by firms within markets. The government can appoint regulators who can impose price controls in most of the main utilities such as telecommunications, electricity and rail transport. These can be used to introduce fresh competition into a market for example breaking up existing monopoly power of a service provider. A good example of this is the introduction of other network providers like Econet and Telecel by Zimbabwe telecom.
Furthermore, in a bid to ensure use resources efficiently, the government can use price controls. These are legally placed regulatory prices imposed on goods and services whereby the government can influence the market for a good through direct controls which include price ceiling and floors. Lipsey, R (200 ) holds that a price ceiling is a rule made by the government that does not allow the price of a good to go above a certain price level. A price ceiling below the equilibrium intend to correct market failure by promoting equity and enable poorer members of the community to purchase commodities like food and clothing. A price floor represents a minimum price set above the equilibrium. It is restriction on price of a good such that it cannot go below a certain level, in this no one can charge less than stipulated price.This can be illustrated on a diagram below.

Fiscal policy intervention can be used by government also. Fiscal policy can be used to alter the level of demand for different products and the patterns within the economy. The government can use indirect taxes to raise the prices of designed to increase the opportunity cost of consumption and thereby reduce the consumer demand towards a socially optimal as a policy to lower the price of merit goods. They are designed to boost consumption and output of products with positive externalities, acknowledged from Lipsey, R (2009).

Samuelson, P (1947) ,delves more on fiscal policy when he said government can use tax relief for financial assistance such as tax credits for business investment in research and development. Also, change to taxation and welfare payments can be used to influence the overall distribution of income and wealth, for example higher direct tax rates on rich households or on increase in the value of welfare benefits for the poor to make the tax and system more progressive.

Consumers suffer from a lack of information about costs and benefits of the products available in the market place. Government action can have a role in improving information to help consumers and producers value the true cost or benefit of a good or service, for example anti speeding television adversting to reduce road accidents and advertising campaign to raise awareness of the risks of drink and driving, adarpted from, Yarian, H (2006).