A2.01.14: Allocative Efficiency

Question 1

Define allocative efficiency

Answer 1

The point at which the market allocates resources at the socially optimum level of output (AR = MC)

Question 2

What are the features of allocative efficiency

Answer 2

• There are many producers / consumers
• Perfect info amongst both producers and consumers
• No barriers to entry
• Firms are profit maximisers
• Consumers are utility maximisers

Question 3

How can we show a change in producer or consumer surplus on a diagram

Answer 3

point where msc=msb or mc = ar

Question 4

How can we show a deadweight loss

Answer 4

Area highlighting MB > MC including allocative efficiency

Question 5

Formula for Social costs

Answer 5

SC = PC + EC

Question 6

Formula for Social Benefits

Answer 6

SB = PB + EB