Resource Allocation

Definition

The basic economic problem dictates that there will never be enough resources to satisfy our unlimited needs and wants. As such, it is very important that we aim to be efficient with the resources that we do have. This is the only way that we can ensure that we will be able to maximise the number of goods and services that we are able to provide. In addition, we will also be more likely to guarantee the long term availability of the resources that are currently available to us.

In Economics, we distinguish between four different types of efficiency:

1. Productive (or Technical) efficiency: This is perhaps the easiest type of efficiency to understand. In this instance, we are interested in ensuring that any time we produce a good or service we are able to do so by using the smallest number of resources. If I use a tree to make four cricket bats, and you can produce five cricket bats from a tree of the same size, then your productive efficiency is better than mine.
   
   
2. Allocative efficiency: In this case, we are also aiming to ensure that the resources that we have are used in a satisfactory manner. That is, we want to produce those things most desired by the community first. This is a problem experienced by many of the world's poorer countries, especially those which suffer from poor governance. Corrupt leaders will often use a countries scarce resources to provide elaborate palaces, rather than ensuring that their people have access to clean drinking water. This is very poor allocative efficiency.
   
   
3. Dynamic efficiency: In the modern world it is important that firms are able to respond quickly to changing economic circumstances. To be dynamically efficient means that firms are aware of the changing circumstances, and they are able to adapt to meet those new needs. For example, as technology has improved, many businesses have elected to adopt computers. This has involved buying the hardware, choosing the correct software and training the staff. In going through this process, the firm is demonstrating their dynamic efficiency.
   
   
4. Inter-temporal efficiency: There is a balance to be found between what we will need now, and what we will need in the future. If we use up all of our resources now there will be a smaller number of resources for a larger population – and this is not a desirable situation! The government aims to ensure that this balance is met. For example, in Victoria the government has recognised that it takes 100 years for an area of forest that has been logged to regenerate. To achieve inter-temporal efficiency, only 1% of the available land can legally be logged in any one year.

However, although we recognise different types of efficiency, it is often difficult to assess our performance in relation to each. As such, measures of efficiency do not distinguish between which “type” is being achieved. However, we can say that our goal is to achieve the “best use” of the productive resources that we have available to us.

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