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 (Approx. 300 words):
Allocative efficiency is a key concept in economics that refers to a situation where resources are allocated in a way that maximizes total societal welfare. This occurs when the production of goods and services reflects consumer preferences — essentially, when the value consumers place on a good (reflected in the price they are willing to pay) matches the cost of resources used to produce it (the marginal cost).
In a perfectly competitive market, allocative efficiency is naturally achieved because of the way prices and output are determined. In such a market, all firms are price takers, meaning they accept the market price as given. They maximize profit by producing the quantity of output at which marginal cost (MC) equals marginal revenue (MR). In perfect competition, marginal revenue is equal to the market price (P), because each additional unit sold brings in exactly the price.
So, firms produce where P = MC, and from the consumer’s perspective, the price they are willing to pay reflects the marginal benefit (MB) they derive from the product. Therefore, the market naturally settles at the point where MB = MC, which is the condition for allocative efficiency.
At this point, the value of the last unit produced (to the consumer) is exactly equal to the opportunity cost of the resources used to make it. There is no underproduction or overproduction; any additional production would cost more than it is worth to consumers, and any less would mean consumers miss out on a product they value more than it costs to produce.
This equilibrium ensures that resources are not wasted and are used in a way that best satisfies the wants and needs of society — the hallmark of allocative efficiency.
