Explain what allocation efficiency is and how it is achieved in pure competition
What will be an ideal response?
Locative efficiency occurs where P = MC. Product price is a measure of society’s relative worth of a product at the margin, or its marginal benefit. The marginal cost of producing a product measures the relative worth of the other goods that could have been produced by the resources used in producing an extra unit of the product. Thus, product price measures the benefit that society gets from additional units of a product. The marginal cost of this unit of a product measures what society has to give up in other products to produce more of this one.
If P > MC, then society wants more units of this product than alternative products that could be produced with the resources. In this case, resources are under allocated to the production of the product. If P > MC, then society wants more units of other products than of this one. In this case, resources are over allocated to the production of the product. Efficient allocation occurs when P = MC because the marginal benefits to society are just equal to the marginal cost of that additional production. This condition will be achieved in pure competition.
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a. True b. False Indicate whether the statement is true or false