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This chapter elaborates the prescriptive-moral and legal relevance of allocative-efficiency conclusions. The relevance of the allocative efficiency of a choice to its justness in a liberal, rights-based society and to its moral desirability, moral-rights considerations aside, and the relevance of the allocative efficiency of an interpretation or application of the law to its correctness as a matter of law or its moral desirability in a liberal, rights-based society is analyzed. The connection between a choice's allocative efficiency and its justness in a liberal, rights-based society is presented. The allocative efficiency of a choice or policy does not depend on whether the equivalent-dollar gains and losses it generates derive from its effects on mere utility or on the opportunity rights-bearers have to lead lives of moral integrity.

Ch. 1 shows the reader how to model asymmetric information and knowledge in theoretical economics. It also introduces the concept of higher‐order knowledge. For the analysis of bubbles it is important to draw a distinction between mutual knowledge, e.g. all traders know that the price is too high, and common knowledge, i.e. they all know this and that all know and so on. Prices are determined in equilibrium. The two most commonly used equilibrium concepts in market settings with asymmetric information are the competitive Rational Expectations Equilibrium (REE) concept and the strategic Bayesian Nash Equilibrium concept. The chapter compares and contrasts both equilibrium concepts and also highlights their conceptual problems. This chapter also introduces and contrasts the two efficiency concepts: informational efficiency and allocative efficiency.

This chapter explains the meaning of restricted competition and the reason for its existence. Also, this chapter is concerned with the main problem of what is meant by a restriction of competition. Restriction of competition is a jurisdictional rather than substantive requirement. This view is regarded as reflecting past practices, but not those to be used in the future. Moreover, this is asserted whenever a purchaser loses an element of the freedom over what to do with goods or services. This shows that competition law aims to protect and promote certain freedoms. However, allocative efficiency is said to be the effect of restricting competition. This effect of restricting competition is determined by the scope and content of the most intensive intervention centres in cases involving collusion legally presumed to have resulted in allocative inefficiency.

Looks at some of the labour market outcomes of recent economic reforms. The extent to which labour market institutions affect the relationship between reform policies and income inequality remains controversial. Some see labour market institutions as a hindrance to more efficient development and growth, while others argue that without proper labour market institutions an economy cannot progress. Labour market policies, regulations, and institutions have at least three goals: improving allocative efficiency (matching supply and demand); improving dynamic efficiency (increasing the quality of the labour force); and improving or maintaining a sense of equity and social justice among labour force participants. These different goals inform the discussion throughout the chapter, which is organized as follows: after an introduction, the second section touches briefly on some theoretical aspects of labour markets and reform policies; the third reviews trends in labour market changes in terms of informalization of employment, wage shares in national income, and wage inequality; the fourth reviews some general trends in labour market policies that have typically been implemented under the Washington Consensus, namely, a decline in minimum wages, shifts in the bargaining power of unions, and a reduction in employment protection; the final section offers conclusions on whether or not labour market policies reduce income inequality.

We measured firm-level relative technical and allocative efficiency drawing from Farrell’s production frontier approach. Technical efficiency captures technology dimension of realization amount output for given level of inputs employed. It is determined by technological, organizational firms and consequent technical efficiency. It shows very large and small firms are relatively technically inefficient compared medium sized firms. And technical efficiency explained exports positively. These results support our main hypotheses. Firm-level allocative efficiency is optimum combination of inputs (labour and capital) given the input prices (wages and capital costs). We argued that India’s factor markets were fragmented: large firms pay lower price to capital and higher price labour in comparison small and medium firms. This, in turn, made large firms deviate from India’s comparative advantage in labour intensity. On the other hand, small and medium scale firms realized allocative efficiency in accordance with India’s comparative advantage.

To date, there has been little analysis of a very basic question: to whom should courts give the initial entitlement? Most authors suggest that courts should grant the initial entitlement to the litigant it believes to have the higher valuation. To maximize allocative efficiency, courts should focus on delegating the allocative choice to the litigant who is the more efficient chooser. From the perspective of the initial entitlement holder, liability rules seem to have compensation as their central aim, whereas from an efficiency perspective liability rules are a means by which an imperfectly informed court can delegate allocative choice to private litigants who potentially have superior allocative information. The allocative efficiency of single-chooser rules is maximized when damages are set equal to the nonchooser's expected value. This chapter discusses single-chooser rules and how courts should determine (allocatively) optimal damage amount for the defendant-choice rules. It demonstrates that the court can decouple questions of distribution from questions of allocation.

Procurement regulation has been developed largely by societies which rely on concepts based on welfare economics in the market economy and is currently being adopted in societies which are embracing the market economy. How those societies respond to the laws of the market depends, to a large extent, on political factors. In the United States, for example, heavily influenced by free market principles, regulatory policy generally reflects the belief that the market works well under normal circumstances and should be interfered with only in specific cases of market failure. The development of procurement regulation within the market economy implies that its purpose is in some way an instrument of the pursuit of economic welfare. This chapter deals with allocative efficiency as well as market and institutional failures leading to conditions of imperfect competition which negatively affect economic efficiency (Pareto efficiency). It also discusses perfect competition, economic theory and procurement, agency theory, consequences for procurement regulation, transaction costs, and barriers to entry.

This chapter presents a concise survey of the economic literature of privatization providing the theoretical backing for the empirical analyses carried out in the book. The chapter shows why private or public ownership may matter in the behavior of firms. Then it surveys the main results of the political economy approach to privatization, taking into account political preferences and government constraints. Finally, it analyzes the optimal privatization method in order to achieve the various economic and political objectives.

This chapter analyzes higher-order liability rules that allow a series of reciprocal takings by the litigants. It shows that second-order liability rules (sometimes also referred to as “unconstrained dual-chooser” rules) can harness information of both litigants in more refined ways than either the single or dual-chooser rules. Indeed, if the takings are costlessly implemented, a sequence of reciprocal takings can mimic an auction that produces first-best allocative efficiency—even in the presence of asymmetric information. The chapter illustrates how courts can optimally tailor second- and higher-order damages, explains how one can view liability rules with reciprocal-takings options as forming a class of “internal” auctions, discusses the relative efficiency of second- and higher-order liability rules, and describes how to apply the “dispositive-takings principle” to optimally select damages. Finally, it provides an application of second-order rules to the problem of the efficient dispositive-takings principle.

Market and institutional failures leading to conditions of imperfect competition which negatively affect economic efficiency (Pareto efficiency) explain many of the provisions which are common to most procurement systems. This chapter addresses a further concern of welfare economics which considers the normative value judgements made by governments and their effect on issues of allocative efficiency. Whilst it is expected that the value choices made by the government would remain Pareto efficient (that is, would fall within one of the many Pareto-efficient options), it is also the responsibility of governments to decide (based on their election promises) which Pareto-efficient option to choose. That is not always achievable and, where it is not, there will be a trade-off between the attainment of a non-economic policy objective and economic efficiency. The success of procurement regulation will be measured by its ability to satisfy the requirements of the context in which it operates. This chapter also discusses the instrumental use of procurement, protective policies and proactive policies, strategic policies, non-discrimination, statutory compliance, and contract compliance.

This chapter reports the results from a large research project bringing together researchers from twenty-four countries to standardize data definitions and construct comparable statistics on producer dynamics and productivity. It shows that within-firm changes in productivity and net entry are the major sources of labor productivity growth in most countries. The measurement errors affect aggregation indicators such as the mean or sum of firm-level data. Differences in average firm size appear to be largely driven by within-sector differences, although in some countries sectoral specialization also plays a significant role. Moreover, the entry of small firms is relatively easy while larger-scale entry is more difficult, but survival among small firms is also more difficult. Surviving firms are relatively larger and tend to grow rapidly. The data show that virtually all the countries exhibit positive allocative efficiency.

Haycox (2009) describes economics as the science of scarcity. Economics analyses how choices about scarce goods and services are structured and prioritized by individuals in order to maximize welfare (Haycox 2009). Should economic theory have any relationship to health and health care? Clinicians will often state that they make their decisions based on their clinical judgement (what is best for the patient in front of them) and that they should not be influenced by concerns over money. Is this view entirely valid? Despite the improvements in health seen in the majority of countries, costs of health care have continued to rise above the general rate of inflation. For example, in the USA, health care costs account for 15% of Gross Domestic Product (GDP), compared to 17% in the UK (Morris et al. 2007). This is due to a number of factors, such as the price of materials, personnel salaries and wages, and the ever-increasing use of more advanced technology. There is little evidence, however, that the increased spending has contributed to better health (Abel-Smith 1996). Indeed, the evidence from Chapters 2 and 4 suggests that health will not be improved just by spending more money on health care. There is a growing awareness that health care resources are finite, while the demand for health care is apparently infinite (Cohen 2008). Economic analysis provides a systematic framework for answering questions about the justification for using these finite and scarce health resources and helps identify solutions to some common problems in health care (Morris et al. 2007). Health economics is therefore the study of the application of economic theory to decision-making about health and health care (Mooney 2003 ; Morris et al. 2007). In this context, health care decision-makers must prioritize choices about interventions informed by an analysis of both the costs and the benefits (Haycox 2009). Getting value for money involves a desire to achieve a health goal at the least cost or a desire to maximize benefits to patients where there is a limited pot of resources (Haycox 2009).

As a matter of theory, liability rules might be more efficient than property rules even when bargaining is possible. But there are reasons to be skeptical of the result. This chapter describes the results of experiments conducted in seven different classes at five law schools. The students were divided into pairs of bargainers and assigned to play the roles of a drive-in owner and a racetrack owner in a dispute inspired by a real case. The dispute concerned the external effect of a racetrack on a neighboring drive-in theater. In the bargaining game, the only issue for negotiation was whether the racetrack would operate at night. The track could increase its profits by operating at night, but doing so would decrease the profits of the adjacent drive-in (because the lights diminish the clarity of the picture). The disputants had private information about their valuations. The results show that liability rules evince a strong information-forcing effect, with high-value plaintiffs trying to bribe and low-value plaintiffs trying to sell. More important, liability rules produce slightly higher allocative efficiency.

This chapter summarizes the preceding discussions and presents some final thoughts. The objective of this book has been to show the potential that the economics of learning and innovation has for revolutionizing both economic theory and policy. It has questioned, for instance, some of the basic tools used by economists. It has shown that comparative advantage needs to be reexamined in light of the increasing mobility of skilled labor and capital. It has explained why, in a learning economy, there is no presumption that the market economy, on its own, is efficient. It has also attempted to provide an analysis of factors that increase a society's learning capabilities and enhance its learning. The chapter concludes that increases in standards of living have more to do with learning, the focus of this book, than with allocative efficiency, the subject which has been the preoccupation of economists. That this is so holds out enormous prospects for the well-being of those in the developing world.

For a reforming government intent on improving efficiency, a natural way to discriminate between alternatives is via optimal taxation. In light of this, we examine quantitatively the extent of progressivity or regressivity of optimal labour income taxation in a model with skill heterogeneity, endogenous skill acquisition and a production sector with capital-skill complementarity. We find that wage inequality driven by the resource requirements of skill-creation implies progressive labour income taxation. In particular, in the steady-state, skilled labour income is taxed about forty percent more than unskilled labour income. We further find that the optimal transition path from the exogenous to optimal policy steady-state also exhibits progressive labour income taxation. These results are explained by a lower work time elasticity for skilled versus unskilled labour which results from the introduction of the skill acquisition technology.

The chapter looks at the key concepts and issues involved in the prioritization of resources for investments and disinvestments in health services. It describes a framework for understanding what needs to be achieved in this arena. It describes three core components that underpin a coherent approach to prioritization (guiding principles, a tool to help gather and sift through the information, and coherent decision-making processes). The pragmatic overview emphasizes that the processes involved in prioritization matter, and that to do this consistently and with transparency for ethical reasons, as well as to make the task more manageable, is important. An example of a prioritization tool and guiding principles are given. Some ethical considerations in this arena are also discussed. In day-to-day work, many of the issues in this arena can be facilitated by applying the principles, even if a full blown priority setting process is not needed.