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Difference between Productive Efficency and Allocative Efficiency

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    Now in a book i have that is "exclusively endorsed by AQA" they define allocative efficiency as " When it is not possible to make anyone better off, without making someone worse off or you cannot produce more of one good without producing less of another".

    So I immediately assume this is true, link it to the PPB (obviously if you can't make more of something without making less of another, you are on the PPB, the economy is at full capacity etc.)

    But my teacher that catches me out and tells me that allocative efficiency is when firms efficiently decide who to produce goods for, or when price = msb. Now, just by looking at the name, that seems to make sense and this website:

    Agrres with him.

    So who is right?
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    All are correct. In fact, my description is usually simply that it exists when firms produce what people want. However, some definitions do make a bit more sense depending on what context you are using them in (for example if you are talking about externalities, you will probably want to use MSB.)


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Updated: January 10, 2011
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