Economic Efficiency Issues - Research Paper Example

The term economic efficiency is not new to economists. The term refers to the production of maximum goods at the minimum possible cost. Economic efficiency includes two broad concepts. One concept states that the production should be done at the minimum possible cost and there should not be any excess cost involved in the production cost. This concept is covered under the heading of cost efficiency. The second concept talks about using the minimum possible resources for the production of maximum possible output. The concept is covered under allocative efficiency. Together these two concepts form the basis of economic efficiency. Economic efficiency is nothing but the presence of both production and allocative efficiency. Production efficiency is another name of cost efficiency. The term can be mathematically defined as following: Economic Efficiency = Productive Efficiency + Allocative Efficiency The above mentioned important concepts of allocative and productive efficiency can be exhibited by using the graphs. The figures 1.a and 1.b above show the necessary conditions for productive efficiency. In Figure 1.a, productive efficiency is achieved where point MC curve has intersected the ATC (Average Total Cost) curve. At this point, the production of Q1 goods is going to cost the least and at this point productive efficiency will be obtained. The same is shown in Figure 1.b. The point where MC interests the ATC curve is the point where the firm is experiencing the minimum possible costs. Any production at this point is going to achieve the necessary conditions for productive efficiency. Source: (Lipsey and Chrystal 2003) The allocative efficiency is always achieved at a point where the minimum amount of effort produces the maximum result. In other words, any change in resources are not going to increase the output because the currently employed resources are producing the maximum output. If there is room for increasing production by changing the resource allocation, then the point of allocative efficiency is not achieved. In figure 2, the point “C” is not allocative efficiency because resources are underemployed and output can be increased by employing more resource. However, Point “A” and “B” are both allocative efficient because resources are producing the maximum output. There is no room for the increase of the production at this point until there is technology advancement or increase in the population, both of which are long-term considerations. Economic efficiency can be looked at from another point of view. Economic efficiency can be described as something that maximizes the benefit of a transaction for both producers and consumers. The benefits for consumer and producers can be looked upon as consumer and producer surplus. Consumer surplus is difference between the total prices that consumers are willing to pay for a product and what they actually pay for it. Similarly, producer surplus is the benefits or money that producers get for providing the goods and services in the market. At any point where the sums of these two benefits are maximized, this is said to be economic efficiency. Any point where there isno room for consumer and producer surplus maximization is said to be economically inefficient. Sources: (Brue and McConnell 2006) In figure 3, we can see that point Q0 is the most efficient point in the diagram. Here the motives of buyers are meeting the motives of suppliers and at this point both consumer and producer surpluses are the highest. Hence, the point is economically efficient. In economic terms, the most efficient point in the above diagram is where Marginal Cost is equated with Marginal Benefit or where demand is equal to supply. Australian government has recently proposed the taxes to tax miners. Since it is a tax on supply, it can be considered as an indirect tax. In essence, this tax is going to increase the final price and reduce the supply of mining products in the market. It will also generate the revenue for the government. The carbon tax is going to charge 30% tax on big mining companies. It has raised concerns from big Indian companies involved in exploration business such as Jindal Steel, BHP Billiton and Rio Tinto. The impact of these taxes is not only loss of job, but it would create economic efficiency. Already there is shortage of workers in this sector; however, this move is going to harm the bilateral trade relations between India and Australia. The impact on economic efficiency of imposition of such a tax is as follows: (Times 2012) Source: (Sloman 2003) Since most of the mining products have inelastic demand, the miners are going to pass on the increased prices to the consumers. This is going to reduce the consumer surplus and will convert it into producer surplus. Some of this amount will go to the government and hence the increase in producer surplus would not be equal to the loss in consumer surplus. This would lead to deadweight loss equal to the area of triangle “ABC”. However, if there would have been an increase in taxation of some good which has a more elastic demand, then both consumer and surplus would have been converted into government revenue causing the decline of the area of total surplus by the triangle “ABC” in the figure “b” titled as elastic demand. There has been a debate in the Australian parliament about raising the wages for apprentice. In other words, these debates are about setting a minimum wage for apprentice workers or setting a price floor. The impact of setting minimum wages can be very distorting for the economic efficiency. It can be seen in the Figure 5 that the introduction of minimum wage from P to P` is going to create excess supply of labor in the sector. These will in turn going to create a deadweight loss which will be equal to the area of triangles “H” and “B”. This would decline both consumer and producer surplus and economic inefficiency will set in. Hence, a good idea for the economic decision makers would be to delay or not to implement such a bill which would lead to high levels of inefficiency in the economy. (Schneiders 2012) In the end, it can be concluded from this paper that economic efficiency is the point where the economic transactions are yielding maximum satisfaction to both consumers and producers. However, an attempt to set a price below or above the efficient point causes the satisfaction level to go down and creates deadweight loss. This deadweight loss results in inefficiency and hampers the working of efficiency in terms of consumer and producer surplus maximization. Hence, good economies try to let forces of demand and supply set the prices and quantity in the economy. Any attempt to hamper the functioning of market forces is going to create inefficiency that is going to lower the levels of satisfaction in the entire economy. References: Brue, Stanley, and Campbell McConnell. Economics. New York: McGraw-Hills, 2006. Lipsey, A, and M Chrystal. Economics. Oxford: Oxford University Press, 2003. Schneiders, Ben. "The Age." 2012. http://www.theage.com.au/national/call-to-lift-apprentice-pay-20120305-1ue8r.html (accessed March 5, 2012). Sloman, John. Economics. New York: Prentice, 2003. Times, Indian. "Economic Times." 2012. http://economictimes.indiatimes.com/news/news-by-company/corporate-trends/indian-ceos-concerned-over-proposed-carbon-tax-by-australia/articleshow/12150421.cms (accessed March 5, 2012). Read More