Allocative Efficiency
Competitive Market Equilibrium
AO2·AO4·Diagram required
Syllabus requirement
Occurs at the competitive market equilibrium where marginal benefit (MB) equals marginal cost (MC), and social surplus is maximized.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Diagram showing allocative efficiency where MB = MC and community surplus is maximized. Can be represented with demand as MB and supply as MC.
Summary
Allocative efficiency occurs when resources are distributed so that no change in price or output can make consumers or producers better off; this is the outcome that maximizes community (social) surplus. Community surplus is the total of consumer and producer surplus at the market price and output, and comparing surplus levels helps judge whether individual, firm or government choices increase or reduce economic welfare.
