Allocative efficiency is the market condition whereby resources are allocated in a way that maximises the net benefit attained through their use. Allocative efficiency refers to a situation in which the limited resources of a country are allocated in accordance with the wishes of consumers. Allocative efficient economy produces an "optimal mix" of commodities. A firm is allocatively efficient when its price is equal to its marginal costs (that is, P = MC).

See also: Pareto efficiency

References

allocative efficiency

Economic efficiency

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When does a market achieve Allocative Efficiency?

A firm is allocatively efficient when its price is equal to its marginal costs (P=MC) A market will be allocatively efficient if it is producing the right goods for the right people at the right price. An allocatively efficient market is therefore one which has no imperfections. This will be true when marginal cost is equal to average revenue in the market. It occurs where a firm produces at MC = AR (marginal cost pricing). That is to say, in a situation where society produces goods and services at minimum cost that are wanted by consumers the market is allocatively efficient.

Allocative efficiency is also referred to as Pareto Efficient Allocation, resources cannot be readjusted to make one consumer better off without making another worse off so there is zero opportunity cost (not true, opportunity cost is never zero, as it is the measure of the benefit that could be gained by employing resources in their next best use. So regardless of the efficiency of resource allocation as long as there's something else that could be done with the resources, there's an opportunity cost.)

When does it not?

When a market fails to achieve allocative efficiency and resources are not allocated efficiently, there is said to be market failure. Market Failure occurs where; Knowledge is not perfect – ignorance, Goods are differentiated, Resource immobility, one firm has too much Market power, where Services/goods would or could not be provided in sufficient quantity by the market, it can also be caused by the Existence of external costs and benefits or where Inequality exists in the bargaining power of consumers and producers.