Why does Allocative efficiency provide greater overall welfare than Productive efficiency?

Answer 1

Productive efficiency refers to a situation where the factors of production receive their just economic returns. This situation may not be socially ideal since people who are unemployed or cannot work because of old age or illness would not receive an income. In these circumstances, it would be an improvement in overall welfare if a tax is imposed on those who receive a good income and the proceeds redistributed as transfer payments to the elderly or ill or less fortunate in society. This area of study is called welfare economics. Economic efficiency can be improved if the PARETO CRITERION is satisfied. According to this criterion any change that makes at least one individual better-off and no one worse-off is an improvement in social welfare. If no further changes can be made to improve welfare, the situation is said to be Pareto-optimal or Pareto-efficient. Pareto-optimality is achieved through a re-distribution (or re-allocation) of income. In simple terms, its taking from the rich who really don't need all the money they have and giving to the poor who really need it to survive.

Answer 2

Assume you have a fixed size pie.

Now there are two ways of distributing it:

1 Give to mum and myself who made the cake, and some to dad whos emoney we took to buy the ingredients. Say I get 30%, mum gets 30%, and dad 40%. Since kid brother and kid sister and the three cousins in no way contributed to the cake, they get nothing. Only three of us get to eat it.

2 There are 8 of us: Mum, Dad, Kid brother, Kid sister, three cousins, Myself. This pie is here sitting on the table. Let's cut it into 8 equal-sized pieces and eat it.

Which one do you think will make for higher welfare? Sure, Dad, Mum and myself will be full, probably even have to keep some of the pie in the fridge, but the rest will go hungry under scenario 1 (Productive Efficiency). In the second case (Allocative efficiency), we might not all be full, but there will be less people making noise (being unhappy).

Of course the key assumption is what I mentioned right at the start, that the size of the pie is fixed.

Now ask yourself, how many pies would you make if you had to keep giving some away. What if the neighbours always also came in at tea time?

I'd say that there are no absolutes; but in any case, I hope my little story helped.

Answer 3

well logically the answer would be in the question to allocate would mean to give and productive means you have to make it yourself to an extent so in theory the allocative meaning having more than to give overall so that means you have more overall to give...