BUS 3000 Lecture Notes - Lecture 14: Externality, Marginal Cost, Pareto Efficiency

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Definition: productive efficiency is optimal output from given resources or minimal cost for a given output. We have already seen the concept of productive efficiency in our discussion of production. Definition: allocative efficiency is the optimal allocation of resources. Allocative efficiency implies not only the optimal output from given resources (productive. Efficiency) but also the optimal output desired by society. Allocative efficiency is the output that maximizes the net social benefit of society, i. e. , maximizes the difference between total benefit and total cost to society. Maximum net social benefit => p = mc. Maximum net social benefit implies the output where the benefit to society of an additional unit of output equals the cost to society of an additional unit of output. It is the output where marginal benefit equals marginal cost (mb = mc). Since we measure the marginal benefit by willingness to pay, the market demand for a commodity measures the marginal.

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