The term “allocative efficiency” refers to:
Multiple Choice
the production of the product-mix most desired by society
the allocation of resources to the production of a particular product.
the production of the product-mix most desired by producers.
The correct answer and explanation is :
The correct answer is: the production of the product-mix most desired by society.
Explanation:
Allocative efficiency refers to a state in an economy where resources are distributed in such a way that maximizes the total benefit received by society. This occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the marginal cost of the scarce resources used in its production. In other words, allocative efficiency is achieved when the price consumers are willing to pay for a good or service matches the cost of the resources used to produce it.
At this point, the distribution of goods and services aligns with consumer preferences, ensuring that the right quantity of each product is produced to satisfy societal demand. This optimal allocation means that no resources are wasted, and no one can be made better off without making someone else worse off—a condition known as Pareto efficiency.
For example, consider a market for electric cars. If the marginal cost of producing an additional electric car equals the price consumers are willing to pay for it, allocative efficiency is achieved. This ensures that resources are used to produce the exact number of electric cars that consumers desire, without overproduction or underproduction.
It’s important to note that allocative efficiency focuses on the distribution of goods and services according to consumer preferences, while productive efficiency concerns producing goods at the lowest possible cost. Both are essential for maximizing societal welfare, but allocative efficiency specifically addresses the optimal mix of products desired by society.
In summary, allocative efficiency occurs when the production of goods and services aligns with consumer preferences, ensuring that resources are used to produce the product mix most desired by society.