Allocative Efficiency

Statement

Allocative efficiency is achieved when resources are allocated so as to maximise society’s welfare — at the output where price equals marginal cost ($P = MC$).

Notes

Allocative efficiency is about what is produced: it asks whether resources are devoted to the goods society most values. The condition $P = MC$ holds because price reflects the marginal benefit consumers place on the last unit while marginal cost reflects the marginal cost to society of producing it; where the two are equal, the last unit is worth exactly what it costs, and welfare cannot be raised by producing more or less. It is distinct from productive efficiency, which concerns producing at lowest cost rather than producing the right mix. How the market structures compare on allocative efficiency is set out in efficiency in markets.