Allocative Efficiency

Allocative efficiency, also known as Pareto efficiency, was put forward by Italian economist Vilfredo Pareto. Pareto noticed that 80% of the land and wealth in Italy was owned by 20% of the population. Pareto analyzed other areas and found the same. This theory was also known as 80/20 rule. Another economist, Dr. Joseph M. Juran also found some similar instances and referred to it as a universal principle, which he named as 'Vital Few and Useful Many'. The instances of 80/20 theory can also be found in today's complex business economics. Some of the instances are

• About 20% of the entrepreneurs earn more than 80% of the population in the world.
• In sales, 80% of business comes from 20% of the customer base and 20% of the customers make 80% of the complaints!
• Also 80% of a town's traffic is managing on a mere 20% of road availability.

Allocative efficiency can be defined as a condition in the market structure where all of resources are allocated in such a way so as to maximize the net profit achieved through their use. This is one of the standard allocative efficiency definitions. Allocative efficiency refers to a situation in which the limited resources of a company/country are allocated according to consumer's wishes. Allocative efficient economy produces an 'optimal mix' of commodities. This method of measuring profit can be implemented in various organizations, both public and private. In short, allocative efficiency is all about having more benefits while producing relatively few liabilities. This theory is more or less similar to the law of supply and demand and demand and supply analysis.

Productive and Allocative Efficiency

Productive efficiency is defined as the production of goods and services at minimum cost. It can be measured by the total number of output produced from a given quantity of inputs. Organizations depend on the efficiency of their production managers, commonly known as operation managers, as it is the revenue generating aspect of any company. That is why it is often called the 'sharp end' of any business. In productive efficiency, it is impossible to produce more of one goods without producing less of another. One way of measuring economic efficiency is in terms of the market value of outputs produced with a given quantity of inputs. Consumers will always be willing to pay a little extra if the product is of high quality. The companies can achieve higher benefits if they are able to deliver these high quality goods to the consumers at affordable prices.

Allocative efficiency is a different mode of efficiency of an organization. When determining allocative efficiency, the desirability of the goods in the society is the primary parameter rather than the number of goods produced as in productive efficiency. For example, an economy may produce a surplus of leisure items like cars, phones, etc., but at the same time if it produces sufficient quantities of lifesaving drugs, then the economy can be thought of as one employing both productive and allocative efficiency. Let us take some examples to illustrate allocative efficiency. Let us consider a scenario in an economy where two people A and B have two goods, rice and wheat. Person A likes rice and does not want to have wheat and person B likes wheat and dislikes rice. There are 10 bags of rice and wheat each. As per allocative efficiency, A should have all the bags of rice and B should have all the bags of wheat. For any other kind of distribution, A will have some bags of wheat and B would have some bags of rice. So as per allocative efficiency only the goods that are desirable by a consumer should be made available to him.

Applications of Allocative Efficiency

Allocative distribution can greatly benefit in the following areas:

• It can help an organization in reducing customer complaints
• It can prove to be useful in having a better organizational structure
• It can help in Six Sigma implementation in your organization.
• Allocative efficiency, on an individual level can help in managing personal finances and better time management

So, this was a bit about allocative efficiency. Along with the numerous other analytic theories, organizations today use this as a tool to prioritize their plans so as to achieve maximum profit keeping societal responsibilities in mind. Although it is a very vast topic, we have tried our best to help you with some valuable information.