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Resource Allocation Methods – Efficiency and Equity (1/4) | Principles of Microeconomics

December 6, 2019

In this lecture, we’ll look at how efficient
and “fair” different resource allocation methods are. First, I’ll start by explaining some of
the possible resource allocation methods that exist. Next, I’ll introduce the concepts of benefits,
costs, and consumer and producer surplus. Then I’ll talk about how the competitive
market gives us the most efficient outcome. Lastly, we’ll discuss if the most efficient
outcome is “fair”. Let’s start by explaining the different
resource allocation methods that exist. Market price is an allocation method that
allocates goods and services to people who are willing and able to pay for them. Those who cannot pay, or those who can afford
to pay but are not willing to pay, will not get the resource. However, governments often subsidize or provide
resources that are considered to be necessities. In Canada, the government provides infrastructure
like roads and subsidizes public transit. In a command economy, resources are allocated
by a central authority. This method is often used to allocate resources
within businesses. The CEO often makes the important business
decisions and allocates company resources accordingly. This approach works well when it is clear
who is in charge and what they are in charge of, but does not work when the range of activities
that need to be monitored are too large. Basically, this method is not as effective
for a scale as large as an entire country as it is for a company. Majority rule allocates resources based on
what the majority of a population wants. Most Western countries use this method to
elect governments, for example. This method works well when decisions being
made affect a large number of people, but the process takes a long time to organize
and is also quite expensive to organize. A contest allocates resources to one or a
group of winners. This works when the efforts of the players,
let’s call them, are hard to monitor and reward directly. Consider a situation when a manager offers
a prize. Everyone will work harder because they want
the prize, even though only one or a few people will end up with the prize. Since everyone is working harder, output is
greater, so the company is better off. However, there could be an incentive to cheat
in this scenario to gain the resource unfairly. Allocating resources by a first come, first
serve method works when a resource can only serve one person at a time. Think about a bank ATM. You can only have one person using an ATM
at one time, and so a line forms where the next person in line gets to use the ATM after
the first person is done using it. A lottery system is a randomized way of allocating
resources. It is often used to allocate electromagnetic
frequencies in telecommunications, for example. It works well when there is no effective way
to distinguish among potential users of a scarce resource. You wouldn’t be able to rationalize giving
one person the resource over another. Allocating resources by personal characteristics
works in scenarios such as picking a dating or marriage partners. In this scenario, one often only looks at
personal characteristics. However, if a company tries to allocate jobs
based on personal characteristics that don’t have anything to do with the requirements
of the job itself, it would be considered discrimination. Force is different from a command system in
that there may not be a single centralized authority giving out commands. In the case of property rights, the police
would investigate a break in and catch the thief, but the legal system would then process
and sentence the robber. Neither the judicial system nor the police
do both things. Using force allows governments to redistribute
income in an economy. However, using force to redistribute wealth
from one country to another by waging war is not a good allocation method.

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