7/21/2019 Efficient Resource Allocation

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Efficient resource allocation over different time periods

To compare the benefits received from allocating a quantity of resource to some future

 period with those of the current period, the future benefits have to be discounted for time to

reflect time value of money (see the compounding /discounting formula). With scarce resourcesinvolving allocation over different time periods, the marginal benefit (net of cost) of thedifferent time periods have to be discounted for time, to be comparable.

Resource allocation is dynamically efficient if the present value of marginal net benefits

of different time periods are equal. Allocation of resources across “n” time periods is  dynamically efficient if it maximizes the present value of net benefits that could be received

from all the possible ways of allocating those resources over the “n” periods.

Dynamic efficiency assumes the objective of society is to balance the current and future

use of a resource by maximizing the present value of the net benefits derived from the use of theresource. The present value of a stream of benefits (B.,…………,B) received over a period of

“n” years is computed as