Allocative Efficiency
Allocative efficiency occurs when resources are distributed to produce the combination of goods that maximises total welfare. This reflects consumer preferences and values. In perfect competition, price equals marginal social benefit, achieving allocative efficiency.
Real World
When Spotify uses algorithms to recommend music based on listener preferences, it moves the market closer to allocative efficiency by matching production of playlists and podcasts to what consumers actually value.
Exam Focus
State the condition P = MC and explain why monopolies fail to achieve it for full marks.
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