Lecture Notes: Chapter 5 – Efficiency and Equity
Based on Microeconomics: Canada in the Global Environment, 11th Edition
Introduction
Scarcity forces societies to make choices about how to allocate limited resources. But how
should these resources be allocated? Is the market system the most efficient? Is it fair? In this
chapter, we explore alternative methods of resource allocation, the connection between marginal
benefit and demand (consumer surplus), marginal cost and supply (producer surplus), and the
conditions under which markets are efficient or inefficient. We also look at concepts of fairness
and equity, and how they intersect with market outcomes. Throughout, graphs help visualize
these ideas to support deeper understanding.
1. Alternative Methods of Allocating Scarce Resources
Scarce resources can be allocated in several ways. Each method has different consequences for
efficiency and fairness.
1.1 Market Price
When goods are allocated based on market price, those who are willing and able to pay receive
the goods.
Example:
Concert tickets or real estate in a competitive market are allocated to buyers who pay the most.
This method is efficient in competitive markets but may not always be seen as fair.
1.2 Command System
In a command system, allocation is determined by a central authority, typically the government.
Example:
Public schooling or military resources are allocated by the state based on need or policy goals.
This system can be fair or efficient depending on context but may result in inefficiencies due to
lack of market signals.
1.3 Majority Rule
Here, decisions about allocation are made through voting.
, Example:
Public budgets are often decided via democratic processes, such as tax funding for healthcare or
infrastructure.
Can be fair but may ignore minority preferences.
1.4 Contest
Resources are allocated through competition.
Example:
Job promotions, sports tournaments, or scholarships are often awarded to the best performer.
Promotes effort and merit but can be unfair to those with fewer opportunities to compete.
1.5 First-Come, First-Served
Access is based on order of arrival.
Example:
Queues for product launches or restaurant seating.
Simple but can be inefficient and time-wasting.
1.6 Lottery
Goods are distributed randomly.
Example:
Housing lotteries or visa allocations.
Seen as fair in giving everyone equal chance, but not efficient.
1.7 Personal Characteristics
Resources are allocated based on attributes like age, race, or connections.
Example:
Family inheritances or traditional roles in small communities.
May be efficient in cultural contexts but can be discriminatory and unjust.
1.8 Force
Resources are taken or allocated through coercion.
Based on Microeconomics: Canada in the Global Environment, 11th Edition
Introduction
Scarcity forces societies to make choices about how to allocate limited resources. But how
should these resources be allocated? Is the market system the most efficient? Is it fair? In this
chapter, we explore alternative methods of resource allocation, the connection between marginal
benefit and demand (consumer surplus), marginal cost and supply (producer surplus), and the
conditions under which markets are efficient or inefficient. We also look at concepts of fairness
and equity, and how they intersect with market outcomes. Throughout, graphs help visualize
these ideas to support deeper understanding.
1. Alternative Methods of Allocating Scarce Resources
Scarce resources can be allocated in several ways. Each method has different consequences for
efficiency and fairness.
1.1 Market Price
When goods are allocated based on market price, those who are willing and able to pay receive
the goods.
Example:
Concert tickets or real estate in a competitive market are allocated to buyers who pay the most.
This method is efficient in competitive markets but may not always be seen as fair.
1.2 Command System
In a command system, allocation is determined by a central authority, typically the government.
Example:
Public schooling or military resources are allocated by the state based on need or policy goals.
This system can be fair or efficient depending on context but may result in inefficiencies due to
lack of market signals.
1.3 Majority Rule
Here, decisions about allocation are made through voting.
, Example:
Public budgets are often decided via democratic processes, such as tax funding for healthcare or
infrastructure.
Can be fair but may ignore minority preferences.
1.4 Contest
Resources are allocated through competition.
Example:
Job promotions, sports tournaments, or scholarships are often awarded to the best performer.
Promotes effort and merit but can be unfair to those with fewer opportunities to compete.
1.5 First-Come, First-Served
Access is based on order of arrival.
Example:
Queues for product launches or restaurant seating.
Simple but can be inefficient and time-wasting.
1.6 Lottery
Goods are distributed randomly.
Example:
Housing lotteries or visa allocations.
Seen as fair in giving everyone equal chance, but not efficient.
1.7 Personal Characteristics
Resources are allocated based on attributes like age, race, or connections.
Example:
Family inheritances or traditional roles in small communities.
May be efficient in cultural contexts but can be discriminatory and unjust.
1.8 Force
Resources are taken or allocated through coercion.
