Allocative efficiency

Gtiell, R.C. and M. Fischbaum (1996) Toward allocative efficiency in the prescription drug industry , The Milbank Quarterly, 73, pp. 213-30. 

The production efficiency properties of PCR are complemented by its allocation efficiency, as under certain restrictive conditions, the resulting price structure can in the long term converge with that of Ramsey prices, that is, it provides a solution to a problem of consumer surplus maximization... 

Mainstream economics presupposes that the market is, in conditions of perfect competition, an automatic mechanism for resource allocation that leads to allocative efficiency, that is, allows the maximization of consumers welfare with available resources. On this basis, liberal economists tend to defend that public powers should abstain from intervening in or regulating the market, assuming that the result of any intervention will distort resource assignation and cause efficiency and welfare losses for society. Nevertheless, even those economists who are most staunchly in favour of the free market acknowledge that there are situations in which laissez-faire, the inhibition of the public powers, is not the best course of action. 

There are various perspectives from which to evaluate the efficiency of pharmaceutical research. One is whether the optimal amount of research is being conducted. Too many or too few resources could be allocated to this purpose. A second dimension is whether this research is carried out in the most effective manner so that output is maximized for given levels of input. In this section I consider both of these dimensions the first is termed allocative efficiency, and the second is termed technical efficiency. 

On the allocative efficiency of pharmaceutical research, there are theoretical reasons why there could be either under- or overinvestment in research. On the one hand, research activities, and particularly basic research, generate substantial positive externalities in that their total benefits to society exceed those accruing to the particular firm. As a result, firms do not incorporate their full measure of benefits when making their investment decisions. 

Guell, R. and M. Fischbaum. 1995. Toward Allocative Efficiency in the Prescription Drug Industry. Milbank Quarterly 73 213-229. 

Allocative efficiency defines the extent to which the quantity of product and service supplied is efficient 39. In a broad perspective this means that all customers who are willing to pay a price equal to or above the marginal cost of production and transportation shall be supplied with gas. When it comes to transportation services only, the aim is to have sufficient capacity to serve all shippers with a willingness to pay a tariff equal to or above marginal transportation costs. Allocative inefficiency exists if this aim is not met or if there is excess capacity due to lack of willingness to pay the given tariff. 

An allocative efficient development of capacity is closely linked to the issue of security of supply in a long-term perspective. This issue is thus further discussed in Section 4.6 of this paper. 

The theory discussed here will concentrate on allocative efficiency, but as with all discussions of allocative efficiency, elements of technical efficiency will automatically be involved and at least implicit recognition of these elements will be evident. The allocative efficiency concerns will be placed in a dynamic framework we will be attempting to establish a notion of dynamic pure competition that has analytical and public policy implications. The concept of dynamic pure competition will describe a hybrid form of workable competition as the term is used by industrial organization economists. 

After questions of scale and distribution have been settled, then markets and prices can be relied upon to achieve their traditional purpose - an efficient allocation of resources how many shoes will be produced at a particular price, versus how many bicycles, and so forth. Allocative efficiency by itself does not ensure sustainability, which is why questions of scale and distribution must be settled first, as ecological economists see it. 

Allocative Efficiency. For each trader, i, the maximum theoretical profit available, TT, is the difference between the price they are prepared to pay (their limit price ) and the theoretical market equilibrium price, Pq. Efficiency, E, is used to calculate the performance of a group of n traders as the mean ratio of realised profit, 7Tj, to theoretical profit, tt ... 

Overall, AAd is the dominant strategy of the four tested (see Table 2), with significantly higher allocative efficiency and significantly lower Smith s a than both ZIPm and ZIP across all market speeds (RRO, p < 0.048). This confirms the dominance of AA over ZIP reported in the literature (for the full set of detailed results, see [22]). 

Gode, D., Sunder, S. Allocative efficiency of markets with zero-intelligence traders markets as a partial substitute for individual rationality. J. Poht. Econ. 101(1), 119-137 (1993)... 

In this section, we tie together the mechanism design approach and the competitive equilibrium approach. The basic idea is to construct efficient ascending-price auctions that terminate with the outcome of the VCG mechanism. With this, price-taking behavior is a game-theoretic equilibrium of the auction despite the effect that an agent s bids might have on future price dynamics. The auctions provide a dynamic method to compute a set of competitive equilibrium prices, from which allocative efficiency follows. 

In summary, Ihe secondary market is a driver of two forces of efficiency gain - allocative and informational. Allocative efficiency is achieved by the inventory pooling effect. While each retailer individually owns and manages a loeal inventory, the market serves as a middleman to redistribute the inventories across the local inventories. The decentralized inventory system with the market would attain the full eflBciency of a eentralized system, if the transshipment of goods were costless and instantaneous. Further, the market ean aggregate diverse pieces of relevant information and present the summary in Ihe form of price. In fact, the informational role of secondary markets puts the decentralized systems even better than the centralized system, since the latter has no easy way to obtain the information dispersed in bits and pieces aeross the channels (see Hayek, 1945). 

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