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July 15, 2005


John Whitehead

The definition of allocative efficiency from Wikipedia may help in understanding the type of efficiency that may result from following the recommendations from a well-done benefit cost analysis:


Dave Iverson


Here is Wikipedia’s definition of allocative efficiency: "the market condition whereby resources are allocated in a way that maximises the net benefit attained through their use. Allocative efficiency is also defined as the production of the quantity that is most beneficial to society. A firm is allocatively efficient when its price is equal to its marginal costs (that is, P = MC)."

If we are dealing with perfectly competitive markets,along with all the other assumptions of the neo-classical ideal, we would expect these condtions to hold. We seldom are. In particular in government land management, were I practice, we seldom are dealing with anything other than contrived markets.

For Government Production Entities:

Milton Friedman railed against trying to run the government like a business in his 1981-vintage “Market Mechanism and Central Economic Planning.” Friedman called games where government entities sought such to mimic market pricing “playing at capitalism.” I argued later that when the government conjoured up non-market prices to put into cost-benefit calculations we were one step beyond the condition Friedman deplored. I called such games “pretending to play at capitalism.” I deplore both. If we want to run some governemnt function or entity like a business, the best way to do so is to privatize it. If not, then we ought to practice Adaptive Management (which includes, but is not dominated by, attention to costs and revenues if and when revenues are collected).

Peter Druker also blasted such attempts to run government entities like businesses in his book MANAGEMENT. W. Edwards Deming took a higher road than playing “attack dog” in his book THE NEW ECONOMICS. Deming’s approach is to manage, in essence to apply the principles of adaptive management. Like Drukcer, Deming warns against reducing all to cost and benefit numbers, fearing that short-sighted managers would destroy the long term viablity of enterprises by “creaming,” by enhancing short-term revenues to seemingly bolster performance indices.

For Non-government Entities:

I think the proper economic model for private sector analysis is more often monopolistic competition, oligopoly, or monopoly rather that perfectly competitive markets. I will not delve deeper today as to the proper conditions for allocative efficiency where markets depart from perfectly competitive markets assumptions. But I doubt that they are those where price=MC.

PS. I’m a bit rusty at my critiques of neo-classical theory, since I abandoned my neo-classical practice some time ago. So give me time to gear-up and become less rusty as I continue to play in discussions over at Environmental Economics.

Dave Iverson

Since John Whitehead served up Wikipedia as a source I dug a bit deeper there and uncovered “Environmental Economics.” http://en.wikipedia.org/wiki/Environmental_economics
I noticed this near the end under “Alternative approaches to Environmental Economics” :

“The more radical Green economists reject neoclassical economics in favour of a new political economy beyond capitalism or communism that gives a greater emphasis to the interaction of the human economy and the natural environment, acknowledging that ‘economy is three-fifths of ecology’” - Mike Nickerson.

Following the links: “Green economics loosely defines a theory of economics by which an economy is considered to be component of the ecosystem in which it resides. A holistic approach to the subject is typical, such that economic ideas are commingled with any number of other subjects, depending on the particular theorist. Proponents of feminism, postmodernism, the ecology movement, peace movement, Green movement, green anarchism and the anti-globalization movement have used the term to describe very different ideas. Accordingly, green economics has been viewed as external to mainstream economics, although there are varying degrees of diffusion and debate on what are the points of contention. It is thus preferable to refer to a loose school of "green economists" rather than any single "green economics".

“These more radical approaches would imply changes to money supply and likely also a bioregional democracy so that political and economic and ecological "environmental limits" were all aligned, and not subject to the arbitrage normally possible under capitalism.”

So there you have it.. We who advocate for a more humble approach to economics embedded in society, embedded in the earth--we who advocate for the older political economy approach with special attention to social and ecological implications of human action are now labeled “radicals.” So it goes…

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