Allocative Efficiency

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    Allocative efficiency occurs when a firm produces at . Resources are used to produce what consumers want and in the quantities demanded. Basically, consumer surplus is maximized.

    If good X’s then X is under-consumed, there is lost consumer surplus so there is allocative inefficiency. Consumers value X higher than firms do because . If X’s , X is overconsumed so there is allocative inefficiency. Consumers value X more than firms do because .

     

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