CHAPTER 5: EFFICIENCY AND EQUITY
Scarce resources might be allocated by
Whoever is willing to pay the price will attain the
good or service
Example: manager giving direction for employees
Prize, best wins
Example: restaurant seating basis
Equally divide resources
One individual wins all resources
Associated with discrimination (white people get
jobs over colored)
War will reallocate oil
How does each method work?
When a market allocates a scarce resource, the people who get the resource
are those who are willing to pay the market price.
Most of the scarce resources that you supply get allocated by market price.
You sell your labour services in a market, and you buy most of what you
consume in markets.
For most goods and services, the market turns out to do a good job.
Command system allocates resources by the order (command) of
someone in authority.
For example, if you have a job, most likely someone tells you what to
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.
Majority rule allocates resources in the way the majority of voters
Societies use majority rule for some of their biggest decisions.
For example, 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 lots of people and
self-interest must be suppressed to use resources efficiently.
A contest allocates resources to a winner (or group of winners).
The most obvious contests are sporting events but they occur in other
For example, The Oscars are a type of contest.
Contest works well when the efforts of the “players” are hard to
monitor and reward directly.
A first-come, first-served allocates resources to those who are first in
2 Casual restaurants use first-come, first served to allocate tables.
Supermarkets also uses first-come, first-served at checkout.
First-come, first-served works best when scarce resources can serves
just one person at a time in a sequence.
When a resource is shared equally, everyone gets the same amount of
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 implementation.
It works best for small groups who share common goals and ideals.
Lotteries allocate resources to those with the winning number, draw
the lucky cards, or come up lucky on some other gaming system.
Provincial lotteries and casinos reallocate millions of dollars worth of
goods and services each year.
But lotteries are more widespread. For example, they are used to
allocate landing slots at some airports.
Lotteries work well when there is no effective way to distinguish
among potential users of a scarce resource
Personal characteristics allocate resources to those with the “right”
For example, people choose marriage partners on the basis of personal
But this method gets used in unacceptable ways: allocating the best
jobs to white males and discriminating against women.
Force plays a role in allocating resources.
3 For example, war has played an enormous role historically in
Theft, taking property of others without their consent, also plays a
But force provides an effective way of allocating resources—for the
state to transfer wealth from the rich to the poor and establish the legal
framework in which voluntary exchange can take place in markets.
Demand, Willingness to Pay, and Value
Value is what we get, price is what we pay.
The value of one more unit of a good or service is its marginal
We measure value as the maximum price t