Question

Allocatively 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 amount of consumer and producer surplus are maximized
D. The areas of consumer and producer surplus are equal

Answer 1

Allocative efficiency is achieved when the output level is where the combined consumer and producer surplus are maximized, which is when price equals marginal cost. Monopolies disrupt this balance, causing allocative inefficiency.

Step-by-step explanation:

Allocative efficiency occurs only at that output where the combined amount of consumer and producer surplus are maximized. This state is achieved when firms produce the quantity of output where the price (P), which represents the social benefit or the marginal benefit to society, is equal to the marginal cost (MC) of production, which represents the social cost. When P = MC, the allocation of resources is considered efficient because it reflects a balance of what society values and what it costs to produce, ensuring no additional welfare can be gained by producing more or fewer goods.

In the case of a monopoly, this balance is disrupted, resulting in allocative inefficiency since the price charged by monopolists exceeds the marginal cost, leading to reduced quantity sold at a higher price than in a competitive market, hence consumers suffer.