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July 20, 2018 

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WEALTH OF NATIONS, THE: Officially titled "An Inquiry into the Nature and Causes of the Wealth of Nations", this book written by Adam Smith and published in 1776, is considered to be the foundation for the modern study of economics. The Wealth of Nations was the first to combine assorted economic discourse and analyses into a single book. One of its most important themes is the efficiency of free trade and market exchanges unrestricted by government that leads to macroeconomic full employment and microeconomic efficiency. The Wealth of Nations is one of the most famous books worldwide. It continues to provide economic insight over two hundred years after its initial appearance.

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INEFFICIENT:

The state of resource allocation that exists when the highest level of consumer satisfaction is not achieved from available resources. This state occurs in market exchanges if the price buyers are willing and able to pay for a good does not reflect the satisfaction everyone obtains from the consuming the good or if the price sellers need to charge for a good does not reflect all opportunity cost of producing the good.
An inefficient state of resource allocation means that society is not doing the best it can to address the scarcity problem. Available resources are not used to achieve the greatest possible satisfaction of wants and needs.

Inefficient Markets

An inefficient state occurs if the highest level of consumer satisfaction is not achieved from available resources. A market exchange achieves an inefficient state if the demand price does not reflect the satisfaction everyone obtains from consuming the good or if the supply price does not reflect all opportunity cost of producing the good.

Under these circumstances, a market equilibrium equality between demand price and supply price does not achieve an efficient equality between the value (satisfaction) of the good produced and the value (satisfaction) of other goods foregone. Satisfaction can be increased by producing more of one good and less of another.

Efficient

In contrast, a market exchange achieves an efficient state if the demand price reflects the satisfaction everyone obtains from consuming the good and the supply price reflects all opportunity cost of producing the good, that is, the satisfaction foregone.

Market equilibrium, with equality between demand price and supply price, means the satisfaction obtained from the good is equal to the opportunity cost of production. In other words, the value (satisfaction) of the good produced is the same as the value (satisfaction) of other goods foregone. Satisfaction cannot be increased by producing more of one good and less of another.

Markets and Government

The two primary methods of resource allocation--markets and government--are also the two primary reasons for an inefficient allocation.
  • Markets: Markets can be inefficient "naturally," with no help from government, due to market failures. The primary market failures are public goods, market control, externalities, and imperfect information. In each of these cases, the "natural" market equilibrium equality between demand price and supply price does not generate an equality between the value of the good produced and the value of other goods not produced.

  • Government: Governments can cause an otherwise efficient market to be inefficient through price controls and taxes. Price controls force prices above (price floor) or below (price ceiling) the equilibrium price. Taxes create a wedge between the demand price and the supply price. In each of these cases, the market is unable to achieve an equality between the demand price and supply price, and thus there is no equality between the value of the good produced and the value of other goods not produced.

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Recommended Citation:

INEFFICIENT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: July 20, 2018].


Check Out These Related Terms...

     | efficient | resource allocation | technical efficiency | economic efficiency |


Or For A Little Background...

     | scarcity | efficiency | opportunity cost | satisfaction | value |


And For Further Study...

     | economic goals | three questions of allocation | fourth rule of competition | free enterprise | government functions | production possibilities |


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