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Principles of Economics EfficiencyEFFICIENCYDefinition 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 PossibilitiesDefinition 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 societyAllocative Efficiency is the output that maximizes the net social benefit of society ie maximizes the difference between total benefit and total cost to society Maximum Net Social BenefitPMC 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 MBMC Since we measure the marginal benefit by willingness to pay the market Demand for a commodity measures the Marginal Benefit of a commodity We can therefore say that the allocation of resources is optimal at the output where Price equals Marginal Cost PMC Pareto Efficient Allocation Pareto OptimalityPMCDefinition Pareto Optimality is the allocation of resources where no person is worse off from trading allocation and any addition trade allocation will make some person worse off The Pareto Optimality condition is also satisfied by the output where PMC1
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