Welfare economics is the study of efficiency and equity of resource allocation. Allocative efficiency is the point at which allocations maximize total net benefits of society. Pareto efficiency or optimality is another way to measure efficiency. Developed by Vilfredo Pareto, (1848 - 1923) Pareto efficient allocation of goods occur when no other possible allocation makes at least one individual better [...]
In this article we will discuss about how negative externality becomes a source of economic inefficiency. Suppose John an ambitious rock musician, resort to the practice of playing electronic guitar, every day for five hours in his house. However John’s immediate neighbor, Peter does not enjoy listing to the ear-storming guitar notes. The practice time of John differs from socially [...]
After reading this article you will learn about the relationship between positive externalities and allocative efficiency. Positive externality occurs whenever private markets fail to allocate resources on the basis of full social benefits. Immunization against communicable disease, external benefits from education at schools are typical examples of positive externalities. Individuals who are external to the market exchange are not required [...]