What is the Efficient Allocation of Resources?

Efficient allocation of resources is a characteristic that can be found in an efficient economy, where the optimal distribution meets the wants and needs of the society. Allocative efficiency aims to use resources so that the marginal benefit of those resources to society equals their marginal cost.

Efficient allocation of resources is achieved when the public and private sectors allocate their resources to projects that are the most profitable and will do the greatest good for the community. This promotes economic growth.

The data on a Market can be accessed by companies to make informed decisions. Manufacturers can focus their efforts on the products that are most popular with the public.

Allocative efficiency in economics is attained when the demand and supply curves intersect. Allocative efficiency is present for firms that produce outputs for which the price equals the marginal cost.

Requirements for Efficient Allocation of Resources

A market that is efficient is one where all relevant data about the market, its activities, and all participants are readily available and always reflected by the market price.

To be efficient, a market must be informationally effective as well as transactionally or operationally efficient. All parties are able to access all the necessary information when a market is efficient in terms of communication. In other words, there is no informational advantage for any party over another.

When a market is efficient, the costs of transactions will be reasonable and fair. All transactions will be equally accessible to all parties, and no one will find them prohibitively expensive. When these conditions are met, and the market is efficient capital flow will move to the best place and offer the best risk/reward for investors.

What is the difference between Allocational efficiency and Distributive efficiency?

Allocational efficiency refers to the distribution of goods that best meet the wants and needs of society. Distributive efficiency is achieved when the goods and services consumed are those that need them the most. It focuses on an equitable distribution of resources.