The economists are concerned with the maximization of the society well being due to scarcity of resources and unlimited wants. The scarcity is the presence of limited resources and competition on the demand side (Peter 524). In this situation, the scarce resources are located to the most efficient business via a competitive mechanism because the focus of economics is to allocate resources in the most efficient manner. Similarly, the resource scarcity causes a large allocation of time and effort to appropriate competition.
Resources are scarce in the sense that their availability is limited in relation to the unlimited wants of human beings. Allocating resources to the production of a good to achieve one demand means that some other good cannot be produced, therefore some other want must remain unsatisfied. Therefore, in a free market economy resources are allocated by the price mechanism, which affects business. The equilibrium price is reached when the quantity demand equals the quantity produced. The free market is a discovery procedure where consumers signals their preferences to producers by price movements, and resources are reallocated as changes in preferences are discovered. In this case, the business is forced to produce more goods to match growing demand.
The criterion for efficient resource allocation is achieved when the total welfare of all members of society is maximized, which occurs when marginal welfare is zero (Graham 39). In this case, the marginal benefit of business equals marginal cost in each market. Social welfare is maximized when it cannot be increased either by increasing or reducing output, which means MC=MR. Thus, the free market economy does the efficient allocation of resource, but only on certain assumptions.
Similarly, for efficient allocation to prevail there should be no public goods because a pure public good exhibits non rivalry in consumption. For instance, providing nuclear defense to protect one restaurant does not mean there will be less protection left for other restaurants. Similarly, the pure public good ensure non excludability. In this case, once the public good is provided to one person it is impossible to exclude the other person from its benefit. For instance, offering a nuclear umbrella for one person automatically accord equal protection to neighbors. Thus, this person will not pay towards this public good because no rational person can pay for benefits she or he receive at no cost. When another person sees this person as a free rider , he or she will also refuse to pay. Thus, efficient allocation is incapable of offering public goods. Moreover, lack of merit goods, which consumption is believed to be a meritorious affect efficient allocation of resources. Therefore, public good might offer greater benefits to a person than she or he realizes, which will increase its demand. Finally, effect of efficient allocation is that all costs and benefits are private to the business transaction. The efficient allocation will supply less than the socially optimal quantity of a good provided by external benefit. Therefore, when the allocation of the resource is efficient there does not exist an alternative feasible resource allocation, which can make some people better off without making others worse off.
Graham, Dawson. "The Market and Efficient Resource Allocation." Economic Affairs11.7 (2000): 39-41.
Péter, Eső. "Competition for scarce resources." RAND Journal of Economics 41.3 (2010): 524- 548.