Allocative Efficiency  

Definition: Allocative efficiency occurs when there is an optimal distribution of goods and services. This involves taking into account consumer's preferences.

A more precise definition of allocative efficiency is at an output level where the price equals the Marginal Cost (MC) of production. This is because the price that consumer's are willing to 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.

 

Related Essays and Revision Notes