Question

Alberto Chong of Georgia State University and several colleagues conducted an experiment to test the efficiency of government postal services around the world. They mailed letters to nonexistent businesses in 159 countries and kept track of how many of the letters were returned. Was this test most relevant to evaluating the productive efficiency or the allocative efficiency of these postal services? Briefly explain.

Short answer

Based on the described test, it relates more to the productive efficiency of the postal services as it deals with the productive process and efficiency of services rather than the allocation of resources to maximize the satisfaction of society’s wants and needs.

Step-by-step solution

Understanding Productive Efficiency

Productive efficiency is achieved when goods or services are produced at the lowest possible cost. This involves producing on the very edge of the production-possibility frontier and cannot be done without improvement in technology or an increase in supply of factors of production.

Understanding Allocative Efficiency

Allocative efficiency is concerned with how resources are allocated and involves producing the goods and services that are most wanted by society. Achieving allocative efficiency would mean that the needs and wants of society are being satisfied to the greatest extent possible with the available resources.

Analyzing the scenario

The test carried out by Alberto Chong and his colleagues was related to the return of letters sent to non-existent businesses. This does not involve assessing the costs of production or the technology used. It also does not evaluate whether the resources (in this case, the postal services) are being allocated in a way that maximizes the satisfaction of society’s wants and needs. However, it can be viewed as testing the efficiency of the process, or the capability of the postal services to correct mistakes and return 'undeliverable' mail.

Formulating the answer

Since the focus of the test is on the process or the 'output', it is most relevant to evaluating the productive efficiency of these postal services. Even though it's not directly assessing cost aspects, it can give indications about the quality of the services, which can indirectly be linked with productive efficiency.

Key concepts

Allocative Efficiency

Allocative efficiency involves determining the most beneficial deployment of resources to produce the variety and quantity of goods and services most desired by the public. It's a dynamic concept that seeks to match supply with consumer preferences, which can change over time depending on various factors such as changes in income levels, tastes, and technology.

Imagine a baker choosing to bake more chocolate cakes and fewer vanilla ones based on customers' buying patterns. This is a small-scale example of allocative efficiency—resources (ingredients, oven space) are allocated to produce more of what consumers want (chocolate cake) and less of what they do not (vanilla cake).

In more technical terms, allocative efficiency is achieved when the value consumers place on a good or service (their willingness to pay) equals the cost of the resources used up in making it. This means resources are devoted to their most valued uses and reflect consumer preferences, leading to overall satisfaction.

Production-Possibility Frontier

The production-possibility frontier (PPF) is a graphical representation illustrating the maximum possible output combinations of two goods that an economy can achieve using its available resources and technology, given that all resources are fully and efficiently employed.

Picture a graph where one type of product is on the x-axis and another on the y-axis. The curve that connects the points representing the maximum production of both goods, given the current resources and technology, is the PPF. A point on the curve represents an economy that is operating at peak productive efficiency, utilizing all its resources without any waste.

However, if the economy is producing inside the curve, resources are underutilized, and it is not reaching its full potential output. Points outside the curve are unattainable with the present level of resources and technology. The PPF is a powerful tool because it also illustrates the concept of opportunity cost—the cost of forgoing the next best alternative when making a decision—through its slope. When an economy moves along the PPF, it usually means that producing more of one good will involve sacrificing some quantity of the other good due to limited resources.

Economic Resources Allocation

Economic resources allocation refers to how resources such as labor, capital, and land are distributed to produce various goods and services. Efficient allocation is paramount to a functioning economy, and it dictates how well an economy can satisfy the needs and wants of its people.

Economists often categorize resources into four types: land (natural resources), labor (human worktime), capital (machinery, buildings, infrastructures), and entrepreneurship (the drive to develop new ideas and businesses). How these resources are allocated determines the output of different sectors, industries, and entire economies.

A well-allocated economy would direct resources to sectors that promise the highest returns, thereby maximizing utility and promoting growth. Poor allocation, on the other hand, can lead to inefficiencies and waste. For example, if too much capital is put into an industry that is not growing or is producing goods that are not in demand, those resources are not used in the most effective manner.

Resource allocation can be led by the market forces of demand and supply in a market economy, centrally planned by the government in a command economy, or a combination of both in a mixed economy. Each method has its advantages and challenges, and the effectiveness of resource allocation is a critical factor in a nation's economic health and development.