Allocation of resources is inefficient only if
a. producer surplus is zero.
b. some of the potential gains from trade among buyers are sellers are not being realized.
c.consumer surplus is equal to producer surplus.
d. consumer surplus is lower than producer surplus.
The Correct Answer and Explanation is :
The correct answer is b. some of the potential gains from trade among buyers and sellers are not being realized.
Explanation:
The efficiency of resource allocation in economics refers to how well resources are distributed to maximize the total benefits (or surplus) for society. In an ideal scenario, resources are allocated in such a way that the total surplus — which includes both consumer surplus and producer surplus — is maximized. Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay, while producer surplus is the difference between the price producers receive and the minimum price they are willing to accept.
Inefficient allocation occurs when some of the potential benefits from trade between buyers and sellers are not realized. This could happen in various situations, such as:
- Price Controls: When governments set price ceilings (maximum prices) or price floors (minimum prices), this can lead to shortages or surpluses. For example, if the price is set too low (below equilibrium), sellers may not want to provide enough goods (leading to a shortage), and if the price is too high, demand may fall (leading to a surplus). In either case, not all potential trades that could increase total surplus are occurring, thus the allocation of resources is inefficient.
- Market Failures: Situations like monopolies, externalities (e.g., pollution), or public goods (e.g., clean air) can also lead to inefficient resource allocation. In these cases, the market does not operate in a way that maximizes the total surplus of society.
- Under or Overproduction: If a good or service is either underproduced or overproduced relative to the equilibrium quantity (where supply and demand meet), the result is an inefficient allocation of resources, as potential gains from trade are lost.
In short, the allocation of resources is inefficient if the total surplus that could be achieved by mutually beneficial trades is not realized, often due to external factors that prevent market forces from reaching equilibrium.