Efficiency and Equity: Resource Allocation Methods in Microeconomics

Efficiency and Equity

Learning Objectives

• Describe alternative methods for allocating scarce resources.

• Explain the connection between demand, marginal benefit, and consumer surplus.

• Explain the connection between supply, marginal cost, and producer surplus.

• Explain the conditions under which markets are efficient or inefficient.

• Explain main ideas about fairness and evaluate claims that markets result in unfair outcomes.

Resource Allocation Methods

Overview of Allocation Methods

Scarce resources can be allocated using various methods, each with distinct mechanisms and implications for efficiency and equity. Understanding these methods is fundamental in microeconomics.

• Market Price

• Command

• Majority Rule

• Contest

• First-come, First-served

• Lottery

• Personal Characteristics

• Force

Market Price

When a market allocates a scarce resource, those willing and able to pay the market price obtain the resource. This method is prevalent for most goods and services and is generally efficient in allocating resources.

• Key Point: Market price allocation rewards those who value the resource most highly, as indicated by their willingness to pay.

• Example: Labor services and consumer goods are typically allocated via market price.

Command System

A command system allocates resources by the order of someone in authority. This method is common in organizations with clear hierarchies but is inefficient for entire economies.

• Key Point: Authority figures direct resource allocation, often seen in firms or government agencies.

• Example: Job tasks assigned by a manager.

Majority Rule

Majority rule allocates resources according to the preferences of the majority, typically through voting. This method is used for decisions affecting large groups, such as public spending.

• Key Point: Works well when self-interest must be suppressed for efficient resource use.

• Example: Tax rates and allocation of public funds.

Contest

Resources are allocated to winners in a contest, which may be based on skill, luck, or other criteria. This method is effective when monitoring individual effort is difficult.

• Key Point: Rewards the best performer(s) in a competitive environment.

• Example: Sporting events, awards like The Oscars.

First-come, First-served

This method allocates resources to those who arrive first. It is commonly used when resources can only serve one person at a time.

• Key Point: Simple and fair when resources are limited and sequentially consumed.

• Example: Restaurant tables, supermarket checkout lines.

Lottery

Allocation by lottery gives resources to those selected by chance. This method is used when it is difficult to distinguish among potential users.

• Key Point: Random allocation can be fair when all participants have equal claim.

• Example: Casino winnings, airport landing slots, marathon entries.

Personal Characteristics

Resources are allocated based on personal attributes, such as age, gender, or other traits. While sometimes acceptable, this method can lead to discrimination.

• Key Point: Can be used positively (e.g., marriage partners) or negatively (e.g., job discrimination).

• Example: Selection of marriage partners, discriminatory hiring practices.

Force

Force involves the use of power to allocate resources, such as through theft, war, or government intervention. While sometimes necessary for legal frameworks, it often leads to inefficiency and unfairness.

• Key Point: Can be used for state redistribution or illegal activities.

• Example: War reallocating resources, theft, government taxation.