A perfectly competitive industry achieves allocative efficiency because

Group of answer choices

goods and services are produced at the lowest possible cost.
it produces where market price equals lowest average fixed cost.
firms carry production surpluses.
goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

The Correct Answer and Explanation is:

Correct Answer:
Goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

Explanation:
Allocative efficiency occurs in a market when resources are distributed in a way that maximizes total societal welfare. In a perfectly competitive industry, this efficiency is achieved because firms produce goods and services at a quantity where marginal benefit (MB) equals marginal cost (MC). This ensures that society is receiving the most value possible from its resources.

In perfect competition, firms are price takers, meaning they must accept the market price determined by supply and demand. Because firms seek to maximize profit, they produce at the point where price (P) equals marginal cost (MC):

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P=MC
This means that consumers’ willingness to pay for the last unit (measured by price) matches the cost of producing that unit, ensuring resources are not over- or under-allocated. If firms produced beyond this point, marginal cost would exceed marginal benefit, leading to inefficiency. Conversely, if they produced less, some mutually beneficial trades would be missed.

Why Other Choices Are Incorrect:
“Goods and services are produced at the lowest possible cost.”

This describes productive efficiency, not allocative efficiency. Productive efficiency occurs when firms produce at the lowest average total cost (ATC), but this does not necessarily mean the optimal quantity is produced for society.

“It produces where market price equals lowest average fixed cost.”

Average fixed cost (AFC) is not relevant for determining allocative efficiency. Allocative efficiency depends on marginal cost, not fixed costs.

“Firms carry production surpluses.”

Surpluses indicate inefficiency. If firms overproduce, marginal cost will exceed marginal benefit, leading to wasted resources.

Thus, in a perfectly competitive market, allocative efficiency is achieved when P = MC, ensuring that every unit produced benefits society as much as it costs to make.