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Economic Theory: Allocative Efficiency

Allocative Efficiency, also sometimes called social efficiency, means that scarce resources are used in a way that meets the needs of people in a Pareto-optimal way, and is not to be confused with the concept that resources are used to meet the needs as best as possible.  Though not explicitly (and all too infrequently explicitly not) a statement about the morally optimum use of resources, there is definitely a moral character to the concept, as it is considered good and socially responsible to use society's resources to meet the needs of its citizenry.  But what in fact does allocative efficiency actually say?

First of all, it guarantees only that the allocation of resources will be correct for the wants and tastes of the people involved, and says nothing about the intelligence or correctness of the choices of these people.  For example, there is a tendency to discount the future too heavily, resulting in over consumption and a failure to invest enough (demonstrating inability to delay gratification if interpreted in a psychological manner).

Secondly, the economic meaning of efficiency is not the same as the scientific or engineering meaning, and should not be confused with efficiency in terms of thermodynamics, which also seems to take on a moral character.  When allocative efficiency is not met, it is not necessarily "wasteful" to society, it simply means that someone would be willing to trade goods with someone else in such a way as to increase the benefit that both feel.

This brings us to the third, and probably most important, point about allocative efficiency: allocative efficiency being met only means that there is not someone who would be willing to trade goods with someone else in such a way as to increase the benefit that both feel.  This illustrates the problem with what is called the Pareto-optimal state.  This state, where no one can be made better off without making someone else worse off, is very clearly not the socially optimal state.  It is better than a corresponding un-Pareto-optimal state, by definition, but to say that a state is Pareto-optimal is very different from saying anything about the desirability of the social situation.  Massive poverty, for example, may still exist in a Pareto-optimal state if the poor have no resources to offer in trade to those who have money, food, shelter, etc.  At its heart, despite pseudo-moral goals and claims to the "socially efficient" solution to the problem of scarce resources, allocative efficiency must be clearly understood to not be an articulation of the optimally socially beneficial (i.e. morally "best") distribution of resources.

Allocative efficiency obviously doesn't go as far as we would like to go in achieving a socially beneficial economic state, but it seems like especially from some of the reports we have read) that it is still the a worthy goal and better than a solution that fails to achieve allocative efficiency.  But it is still not even easy to achieve the lesser goal of allocative efficiency (lesser compared to achieving the socially optimal economic state), as there are numerous conditions that must be met for this to happen.