Competitive Equilibrium - The Competitive Equilibrium and Allocative Efficiency

The Competitive Equilibrium and Allocative Efficiency

At the competitive equilibrium, the value society places on a good is equivalent to the value of the resources given up to produce it (marginal benefit equals marginal cost). By definition, this ensures allocative efficiency (the additional value society places on another unit of the good is equal to what society must give up in resources to produce it).

Note that microeconomic analysis does NOT assume additive utility nor does it assume any interpersonal utility tradeoffs. Efficiency therefore refers to the absence of Pareto improvements. It does not in any way opine on the fairness of the allocation (in the sense of distributive justice or equity). An 'efficient' equilibrium could be one where one player has all the goods and other players have none (in an extreme example). This is efficient in the sense that one may not be able to find a Pareto improvement - which makes all players (including the one with everything in this case) better off (for a strict Pareto improvement), or not worse off.

Read more about this topic:  Competitive Equilibrium

Famous quotes containing the words competitive, equilibrium and/or efficiency:

    The shift from the perception of the child as innocent to the perception of the child as competent has greatly increased the demands on contemporary children for maturity, for participating in competitive sports, for early academic achievement, and for protecting themselves against adults who might do them harm. While children might be able to cope with any one of those demands taken singly, taken together they often exceed children’s adaptive capacity.
    David Elkind (20th century)

    There is a relation between the hours of our life and the centuries of time. As the air I breathe is drawn from the great repositories of nature, as the light on my book is yielded by a star a hundred millions of miles distant, as the poise of my body depends on the equilibrium of centrifugal and centripetal forces, so the hours should be instructed by the ages and the ages explained by the hours.
    Ralph Waldo Emerson (1803–1882)

    I’ll take fifty percent efficiency to get one hundred percent loyalty.
    Samuel Goldwyn (1882–1974)