Allocation Efficiency

Allocation is the critical social process of assigning inputs to the production of outputs, thereby initiating the whole chain of economic activities. If inputs are misallocated, health maximization will be impossible, no matter how efficiently the subsequent tasks are performed.

One measure of allocation success is forgone health, which is analogous to opportunity cost in standard economics. Forgone health is the health that would have been gained by producing the best alternative output to which a set of inputs could have been applied.

As with opportunity cost in standard thought, this sacrifice should be minimized when allocation decisions are made.

ENL’s second measure of allocation success is allocation efficiency (Ea). This is a ratio, expressed as a percentage: the gains from allocating inputs to the selected output divided by the maximum gains that could have been achieved by allocating the same inputs to the best alternative output. That is:

Ea = (Gains/Maximum gains * 100)%

For example, if the estimated gains from an allocation choice are 30 units of health, and the estimated gains from the best alternative are 120 units, then the allocation efficiency of this choice is 25%. If the best alternative is chosen, the actual and maximum gains are equal and allocation efficiency is 100%.

In this case the possibility of trade is ignored, and all outputs are therefore assumed to be locally produced and consumed.

Trade further complicates the allocation problem because it becomes possible to allocate inputs to an output that will be exported. Allocation efficiency can help us address this task more intelligently.

The aim in allocation is to maximize allocation efficiency, and this holds no matter where consumption and production take place. Allocation efficiency thus includes the trade possibility and can help us make complex decisions in an open economy.

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