Efficient Allocation of Resources

In the first chapter, we observed that the allocation of resources is a central aspect of modern economics. In fact, it is so central that many modern economists would define economics as the study of the allocation of resources in society. Indeed, efficient allocation of resources is a fundamental problem for any modern economy. We have followed tradition by expressing the problem of resource allocation in terms of the four fundamental questions:

What will be produced?
By what methods?
Using what resources?
For whom?

All of these questions have to do with the allocation of resources and with efficiency. This chapter will discuss the meaning of "efficient allocation of resources" in more detail, and explore the role of markets and competition in promoting efficient allocation of resources. But we will approach those questions by the back door. Our strategy will be 1) to discuss what an efficient economic plan would be like, and then 2) to compare it to the market equilibrium we have discussed in the earlier chapters.

Let's see what we can find out by that approach.