Quiz 1Production EfficiencyEcon 101Professor GuseDefine Production Efficiency.ANSWER. From Parkin: “We achieve production efficiency if we cannot producemore of one good without producing less of some other good. When production is efficie nt,we are at a point on the PPF. If we are at a point inside the PPF, produciton is inefficientbecause we have some unused or misallocated resources or both”Some Remarks.1. There is a broader notion, si mply called efficiency or Pareto efficiency. If a system isbehaving efficiently, it means that it would be impossible to make somebody betteroff without making somebo dy else worse off. Parkin splits this notion into two ideasproduction and allocative efficiency. Note that division here is along the lines of twoof the “big question” we ask in economics. Production efficient is on the “What?”and “How”? side while allocative efficiency is on the “How Much” and “To Whom?”side.Hence if a system is inefficient in the overall Pareto sense, it means that something canbe done to make some people better off without making others worse off. That some-thing maybe a change in how inputs are allocated to various productive process or itmay be a change in how the output from those productive processes are distributedamong the population. Note thatproduction efficiency ⇐ Pareto Efficiencyallocative efficiency ⇐ Pareto EfficiencyThat is, production efficiency is a necessary condition to achieve overall Pareto Effi-ciency, but not a sufficient condition. Similarly for allocative efficiency. Howeverproduction efficiency + allocative efficiency ⇐⇒ Pareto Efficiency.2. Parkin cites one reason we might inside the PPF is that some resources are going“unused”. This may be true, but one must be careful here. For example, if you sittingaround at home and not working, are you one of the “unused” units of labor beingrefered to? No! You might be misallocated, but sitting around at home is leisure and1that is something people value. Land provides another example. If a farmer decidesto not development a parcel of his land into cropland - leaving it forest or marsh -is that land “unused”? Again, probably not. It is likely used to produce ecologicalservices which society values - water quality, biological diversity, etc - services whichwould be degraded if that land were put into tillage. In fact, true examples of totallyunused resources are difficult to find - though gross missallocation or even destructiveuse is not so