Allocative and Productive Efficiency

The allocation of scarce resources is a central concern of economics as well as antitrust law. The two fundamental welfare theorems of economics demonstrate that, in the absence of market imperfections, competitive outcomes and efficient outcomes are linked. Even when market imperfections exist, interventions - by either the government or private parties - can serve to improve efficiency. Some interventions have the potential both to increase and decrease efficiency. In this chapter, we discuss the fundamental welfare theorems and the connection between efficiency and competition. Then, we describe the breakdowns that can occur with market imperfections, as well as the types of interventions that can restore efficiency. In addition, we consider the dilemma facing antitrust enforcers when a given private solution may have both efficiency-enhancing and efficiency-reducing effects