Question

Assuming that the market for cigarettes is in perfect competition, what does allocative and productive efficiency imply in this case? What does it not imply?

Short answer

Cigarettes are regarded as a social disease, their productive and allocative efficiency is unchanged. Cigarettes are regarded as a social problem.

Step-by-step solution

Definition

When the allocation of reosurces is done in such a way that the maximum benefit is being derived for all parties, it is known as allocative efficiency. The ability to produce maximum quantity at minimum cost is referred to as productive efficiency.

Explanation

Producing on the production potential frontier is what productive efficiency requires. Cigarettes are produced and sold at the lowest possible average cost in the long run in a perfectly competitive market.

The term "allocative efficiency" refers to the social preference for a certain place on the production potential frontier. Firms create where P = MC, ensuring that the advantages to consumers of what they are buying, as measured by their willingness to pay, are equal to the costs to society of producing the marginal units, as assessed by the firm's marginal costs.

It does not, however, mean that the result is socially good. Although cigarettes are regarded as a social disease, their productive and allocative efficiency is unchanged. Cigarettes are regarded as a social problem.