Lecture Seven: Efficiency and Equity
October 20, 2011
Resource Allocation Methods
Scarce resources might be allocated by
- Market price: let the market regulate itself
- Command: regulated by the government (communism)
- Majority rule: have a vote
- Contest: the winner of a contest gets first choice
- First come, first served: getting what is available
- Sharing equally: divide up the resources equally
- Lottery: random draw
- Personal characteristics: certain groups of people get certain resources
- Force: “might is right”
When a market allocates a scare resource, the people who get the resource are
those who are willing to pay the market price.
Most of the scare resources that you supply get allocated by the market price
- How much you produce and how much you work depends on how much money
you make for it
You sell your labour services in a market, and you buy most of what you
consume in markets.
- How much work you do and how much you buy depends on how much you
For most goods, the market does a fairly good job of this.
Disadvantages of this System
People with all the resources and wealth therefore determine what gets
produced, even though that might not necessarily benefit the majority of the
Definition - the command system allocates resources by the order (command)
of someone in authority. Example
- If you have a job, most likely someone tells you what to do. Your labour time is
allocated to specific tasks by command.
A command system works well in organizations with clear lines of authority but
badly in an entire economy.
- The Soviets attempted to use this but it was unsuccessful
Disadvantages of this System
Same as above. People in power may have certain interests and use the
resources to support their interests as opposed to trying to benefit the entire
- Soviet Russia often had problems feeding the people of their country, however
they were very advanced in military tactics because the government thought
that was more important so that was where resources were allocated.
Definition - majority rue allocates resources in the way the majority of voters
Societies use majority rule for some of their biggest decisions.
- Government, taxes, public defense ect
- Tax rates that allocate resources between private and public use and tax dollars
between competing uses such as defense and health care.
Majority rule works well when the decision affects a lot of people because it takes
into consideration the interests of those who are affected by the choice.
A contest allocates resources to a winner or a group of winners.
The most obvious contests are sporting events but they occur in other arenas,
such as the Oscars for films.
Contest works well when the efforts of the other “players” are hard to monitor and
reward directly. - Looking at the final product in the competition instead of judging other factors
First Come, First Served
A first come, first serve allocates resources to those who are first in line.
Casual restaurants are an example of how this system works efficiently in
everyday life. However, this does not really work for most parts of the economy
(could lead to corruption, uneven distribution of resources ect)
First come first served works best when scares resources can serve just one
person at a time.
When a resource is shared equally, everyone gets the same amount of it.
- you might use this method to share a dessert in a restaurant
To make sharing equally work, people must be in agreement about its use and
- It works best for small groups who share common goals.
Problems with this System
Some people put more effort into their work, and th