Allocative efficiency

Allocative efficiency is a state of the economy in which production is aligned with the preferences of consumers and producers; in particular, the set of outputs is chosen so as to maximize the social welfare of society.

The principles of rational choice, individual maximization, utilitarianism and market theory further suppose that the outcomes for winners and losers can be identified, compared, and measured.

[2]: 9  A firm is allocatively efficient when its price is equal to its marginal costs (that is, P = MC) in a perfect market.

At this point, the net social benefit is maximized, meaning this is the allocative efficient outcome.

In the single-price model, at the point of allocative efficiency price is equal to marginal cost.

Allocative efficiency is the main tool of welfare analysis to measure the impact of markets and public policy upon society and subgroups being made better or worse off.

[5]: 397 Also, for an extensive discussion of various types of allocative efficiency in a production context and their estimations see Sickles and Zelenyuk (2019, Chapter 3, etc).

[6] In view of the Pareto efficiency measurement method, it is difficult to use in actual operation, including the use of human and material resources, which is hard to achieve a full range of efficiency allocation, and it is mainly to make judgments from the allocation of funds; therefore, analyzing the funds in the stock market.

When the price equals marginal cost of production, the allocation efficiency is at the output level.

In real life, the government's intervention policy to monopoly enterprises will affect the allocation efficiency.