Allocative Efficiency  

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

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.

monopoly

Monopoly sets a price of Pm. This is allocatively inefficient because price is greater than MC.

Alloactive efficiency would occur at the point where the MC cuts the Demand curve so Price = MC. 

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