Economics – Efficiency and market failure | e-Consult

Productive efficiency occurs when goods and services are produced at the lowest possible cost. This means resources are used efficiently, minimizing waste. It's about achieving maximum output from a given set of inputs. A firm is productively efficient if it cannot produce more of a good without incurring additional costs.

Allocative efficiency occurs when resources are allocated to their most valued uses. This means that the marginal benefit to society from consuming a good or service equals its marginal cost of production. In a perfectly competitive market, allocative efficiency is achieved because price equals marginal cost (P=MC). This ensures that resources are directed towards producing what consumers want most.

Dynamic efficiency refers to improvements in the efficiency of resource allocation over time. This includes innovation, technological progress, and the development of new products and processes. It's about moving the production possibilities frontier outwards, leading to higher living standards. Dynamic efficiency is often associated with competition and investment in research and development.