This occurs when there is an optimal distribution of goods & services, taking into trương mục consumer’s preferences.
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A more precise definition of allocative sầu efficiency is at an output cấp độ where the Price equals the Marginal Cost (MC) of production. This is because the price that consumers are willing khổng lồ pay is equivalent to the marginal utility that they get. Therefore the optimal distribution is achieved when the marginal utility of the good equals the marginal cost.
Example using diagram
At an output of 40, the marginal cost of the good is £6, but at this output, consumers would be willing lớn pay a price of £15. The price (which reflects the good’s marginal utility) is greater than marginal cost – suggesting under-consumption. If output increased & price fell, society would benefit from enjoying more of the good.
At an output of 110, the marginal cost is £17, but the price people are willing to pay is only £7. At this output, the marginal cost (£17) is much greater than the marginal benefit (£7) so there is over-consumption. Society is over-producing this good.
Perfect competition – allocatively efficient
Firms in perfect competition are said lớn produce at an allocative sầu efficient màn chơi because at Q1, P=MC
Monopolies – allocatively inefficientMonopolies can increase price above sầu the marginal cost of production & are allocatively inefficient. This is because monopolies have market power & can increase price khổng lồ reduce consumer surplus.
Monopoly sets a price of Pm. This is allocatively inefficient because at this output of Qm, price is greater than MC.Allocative efficiency would occur at the point where the MC cuts the Dem& curve sầu so Price = MC.The area of deadweight welfare loss shows the degree of allocative sầu inefficiency in the economy.
Allocative efficiency & productive sầu efficiency
(cảnh báo producing on the production possibility frontier is not necessarily allocatively efficient because a PPF only shows the potential output. Allocative sầu efficiency is concerned with the distribution of goods and this requires the addition of indifference curves.