12. 1 Productive and Allocative Efficiency

Efficiency

Efficiency requires that factors of production be fully employed, since idle

resources represent an opportunity cost in terms of output that could

otherwise be produced. However, full employment of resources is not

enough to prevent the waste of resources. Even when resources are fully

employed, they may be used inefficiently. Here are three examples of

inefficiency in the use of fully employed resources:

1. Any firm that does not use the least-cost method of producing its

chosen outputs is being inefficient. For example, a firm that

produces 30 000 pairs of shoes at a resource cost of $400 000

when it could have been done at a cost of only $350 000 is using

resources inefficiently. The lower-cost method would allow $50

000 worth of resources to be transferred to other productive uses.

2. If the marginal cost of production is not the same for every firm in

an industry, the industry is being inefficient. For example, if the

cost of producing the last tonne of steel is higher for some firms

than for others, the industry’s overall cost of producing a given

amount of steel is higher than necessary. The same amount of

steel could be produced at lower total cost if the total output were

distributed differently among the various producers.