Allocative eﬃciency occurs only at that output where
A) marginal beneﬁt exceeds marginal cost by the greatest amount.
B) consumer surplus exceeds producer surplus by the greatest amount.
C) the combined amounts of consumer surplus and producer surplus are maximized.
D) the areas of consumer and producer surplus are equal.

Question

Quizplus · Accepted Answer

Allocative efficiency occurs when the combination of production and consumption that maximizes the combined welfare of consumers and producers. This means that the sum of consumer surplus and producer surplus is maximized. Therefore, option C is the correct choice. Options A, B, and D are not necessarily indicators of allocative efficiency. Marginal benefit exceeding marginal cost by the greatest amount (option A) may not always result in the highest combined surplus. Consumers may be willing to pay a very high price for a product, but if the cost of producing that product is also very high, the result may not be allocatively efficient. Similarly, option B, where consumer surplus exceeds producer surplus, may not be efficient as it does not take into account the welfare of producers. Option D, where areas of consumer and producer surplus are equal, may not be an indicator of allocative efficiency, as it is possible to have equal areas of surplus but not necessarily the highest combined surplus.

Allocative Eﬃciency Occurs Only at That Output Where