JC Economics Essay Economic Efficiency & Government Intervention Model Answers
In Microeconomics, the main objectives are allocative efficiency and productive efficiency, termed collectively as economic efficiency. Allocative efficiency is easier to observe in Market Failure topic, whereas productive efficiency is easier to explain when referencing market dominance or market structures.
Here is an important example of a typical question combines both Market Failure and Firms’ Theory.
(a) With the use of examples, explain the concept of economic efficiency
(b) Discuss the assertion that it is only possible to achieve economic efficiency through government measures.
JC Economics Essay – Economic Efficiency
Explain the concepts of allocative and productive efficiency:
AE: MSB = MSC. (Use free market equilibrium as starting point to explain AE)
PE: out produced at lowest cost possible. (refer to perfect competition market)
Explain the concept of economic efficiency and state the conditions that needs to exist for markets to achieve econ efficiency:
– Perfect competition
– No externalities.
– Explain how in theory the market under perfect competition can achieve such efficiencies.
Explain AE & PE, using selected criteria, e.g. definition, conditions, implications, diagram. o Definition & state conditions
a Explain the conditions for each type of efficiency AE: P = MC. What does P & MC measure? When P> MC, P < MC, P= MC what does it mean and the implication on society’s welfare. PE: min point of lowest possible LRAC. What does it mean when firms do and do not produce at min point of lowest possible LRAC, what does it imply about the way the resources are combined? Excess capacity? Over-capacity? Optimum capacity? PPC diagram to highlight the differences.
All points along PPC are productively efficient; only 1 point on PPC that is both PE & allocative efficiency – the point in which the PPC is tangent to the society’s welfare curve.
Remarks by JC Econs Tutor:
1. If the question changes to: With the use of examples, explain the distinction between allocative and productive efficiency , then the following answer will apply:
2. For the first part, there’s a need to highlight the difference between the 2 concepts using selected criteria in each paragraph. An answer that explains one concept of economic efficiency after another is likely to result in a level 2 response. For the second part, the candidate would need to present a balanced response by considering the extent to which the mkt is capable of achieving such efficiencies without govt intervention and evaluating the success of the govt in achieving it. .
JC Economics Essay – Government Intervention
– But the reality is that there will be inefficiencies due to market failures-excess profits, lack of information, externalities, merit goods, public goods might all prevent the achievement of efficiency. This justifies govt intervention to attain a better outcome
– Explain how govt intervention through microeconomic policies might be effective in achieving EE.
– Explain 2 sources of mkt failure (need to span across both AE & PE) and how govt intervention may achieve BOTH productive and allocative efficiency.
– Limitations of govt intervention a. Limitations of the policies mentioned in achieving AE & PE b. How govt intervention may worsen the situation and create new market failure (other side effects)->govt failure.
Explain how in theory the market under perfect competition can achieve such efficiencies. Explain why markets/firms under perfect competition would achieve both AE & PE (incentive driven to max profits)
Summarise how PC markets / firms achieve AE & PE
How AE is achieved & society’s welfare max when PC mkt produces where DD= How PC firms operate at min point of lowest possible LRAC in the long run. But the reality is that there will be inefficiencies due to market failures – excess profits, lack of info, externalities, merit goods, public goods might all prevent the achievement of efficiency. o Explain 2 sources of mkt failure where allocative AND productive efficiency is not achieved mkt dominance and merit/demerit good or public good or factor immobility or imperfect info.
Use diagrams and explain diagrams
This justifies govt intervention to attain a better outcome o Explain how govt intervention through microeconomic policies might be effective in correcting the above mkt failure to attain both productive and allocative efficiency.
Limitations of govt intervention
Limitations of the policies mentioned in achieving AE & PE
o How govt intervention may worsen the situation and create new market failure (other) side effects)->govt failure.
[Evaluation: more judgement options to be discussed more in class (“,)]
Students of H2 Econs should consider the extent to which govt intervention is needed to achieve economic efficiency in reality and if necessary, the type of intervention that might be the most suitable.
L3: For a thorough discussion of both efficiency and market failure and a competent discussion of the role of the government in promoting efficiency overcoming market failure. A reasoned conclusion should be presented. For a competent explanation with either a more limited comment on both efficiency and market failure (perhaps concentrating on productive efficiency) or a full explanation of one but little comment on the other. The role of the government will be discussed in a more limited way but a conclusion should still be presented.
L2: For an undeveloped explanation of efficiency/market failure with very little discussion of the role of the government. Mention of the government will be descriptive rather than in the form of a discussion related to efficiency/market failure. It is likely there will be no conclusion.
L1: For an answer which shows some knowledge but does not indicate that the question has been fully grasped, or where the answer contains irrelevancies and errors of theory.