Bioeconomics
CHAPTER 4
Md. Rezaul Karim
Assistant Professor
Dept. of BTGE
IU, Kushtia.
Email: [Link]@[Link]
What Is Economic Efficiency?
Economic efficiency is when all goods and factors of production in an economy are
distributed or allocated to their most valuable uses and waste is eliminated or
minimized.
Economic efficiency implies an economic state in which every resource is optimally
allocated to serve each individual or entity in the best way while minimizing waste
and inefficiency. When an economy is economically efficient, any changes made to
assist one entity would harm another. In terms of production, goods are produced
at their lowest possible cost, as are the variable inputs of production.
Some terms that encompass phases of
economic efficiency
Allocative efficiency,
Productive efficiency,
Distributive efficiency, and
Pareto efficiency.
Phases of economic efficiency
When economic resources are allocated across different firms and industries
(each following the principle of productive efficiency) in a way that produces the
right quantities of final consumer goods, this is called allocative efficiency.
Productive firms seek to maximize their profits by bringing in the most revenue
while minimizing costs. To do this, they choose the combination of inputs that
minimize their costs while producing as much output as possible. By doing so,
they operate efficiently; when all firms in the economy do so, it is known as
productive efficiency.
Phases of economic efficiency
Distributive efficiency is when the consumer goods in an economy are distributed so that each
unit is consumed by the individual who values that unit most highly compared to all other
individuals.
In economics, the concept of efficiency most commonly used is that of Pareto Efficiency. The
efficiency measure is named after Vilfredo Pareto, an Italian engineer and economist. At peak
economic efficiency (when the economy is at productive and allocative efficiency), the welfare
of one cannot be improved without subsequently lowering the welfare of another. This point is
called Pareto efficiency.
Pareto efficiency in individual consumption
Pareto efficiency in individual production
Pareto efficiency in income or wealth distribution
What is market failure?
Market failure refers to the inefficient distribution of goods and services in the free
market. In a typical free market, the prices of goods and services are determined by
the forces of supply and demand, and any change in one of the forces results in a
price change and a corresponding change in the other force. The changes lead to a
price equilibrium.
Causes of market failures
Market failure may occur in the market for several reasons,
including:
1. Externality
2. Public goods
3. Market control
4. Imperfect information in the market
What is National Income Accounting?
National income accounting refers to the government book keeping system that measures the health of
an economy, projected growth, economic activity, and development during a certain period of time. It
helps in assessing the performance of an economy and the flow of money in an economy.
National Income Accounting Equation
The national income equation represents the relationship between national income and the economy’s
expense, along with other attributes, as shown in the following equation:
Where:
• Y – National income
• C – Personal consumption expenditure
• I – Private investment
• G – Government spending
• X – Exports
• M – Imports
Importance of National Income Accounting
The statistics provided by national income accounting can be used to simplify the procedures and
techniques used to measure the aggregate input and output of an economy.
The data provided is used to frame government economic policies, and it also helps in recognizing
the systemic changes happening in the economy.
National income accounting provides information on the trend of economic activity level. Various
social and economic phenomena can be explained through the data, which helps the policymakers in
framing better economic policies.
Central banks can use the national income accounting statistics to vary the rate of interest and set or
revise the monetary policy.
The data on GDP, investments, and expenditures also helps the government to frame or modify
policies regarding infrastructure spending and tax rates.
The national income accounting data also shows the contribution of different sectors, relative to
each other, towards economic growth.
Exchange rate policy
Depends On Types:
Export Floating
Import Fixed