Question

The economically efficient allocation of a resource balances the marginal benefit of consumption with the marginal cost of production and maximizes the net value derived from the resource

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Answer 1

Allocative efficiency is achieved when resources are distributed in such a way that marginal benefit equals marginal cost, maximized in a perfect competition market. In contrast, monopolies disrupt this balance by setting prices higher than the marginal cost, leading to allocative inefficiency.

Step-by-step explanation:

Allocative efficiency is a fundamental economic principle referring to a situation where the resources are allocated most efficiently, producing an optimal quantity of output. This level of production occurs at the point where the marginal benefit to society from consuming one more unit of a good or service is equal to the marginal cost of producing that unit. Perfect competition is a market structure that naturally aligns with allocative efficiency because firms produce at a point where the price (P) equals the marginal cost (MC). This ensures that the quantity supplied is the quantity most desired by society.

However, in the case of a monopoly, which is the antithesis of perfect competition, the price set by the monopolist is above the marginal cost, leading to a quantity of output that is less than the socially optimal level, and at a higher price. Therefore, a monopoly results in allocative inefficiency, causing consumers to suffer from lower quantities and higher prices than in a perfectly competitive market scenario.