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:
“Developing the muscles of the soul demands no competitive spirit, no killer instinct, although it may erect pain barriers that the spiritual athlete must crash through.”
—Germaine Greer (b. 1939)
“They who feel cannot keep their minds in the equilibrium of a pair of scales: fear and hope have no equiponderant weights.”
—Horace Walpole (1717–1797)
“Nothing comes to pass in nature, which can be set down to a flaw therein; for nature is always the same and everywhere one and the same in her efficiency and power of action; that is, nature’s laws and ordinances whereby all things come to pass and change from one form to another, are everywhere and always; so that there should be one and the same method of understanding the nature of all things whatsoever, namely, through nature’s universal laws and rules.”
—Baruch (Benedict)