In the absence of market failures, allocative efficiency is achieved in a perfectly competitive industry because
A) firms do not need to maximize profits.
B) the industry produces a level of output such that there are increasing returns to scale.
C) the industry produces a level of output such that the marginal cost to producers equals the marginal benefit to consumers.
D) there are barriers to entry.
E) the industry produces a level of output such that the marginal cost of production is minimized.

Question

Quizplus · Accepted Answer

Allocative efficiency occurs when resources are allocated to produce the goods and services that are most desired by consumers. In a perfectly competitive industry, where there are many competing firms and no barriers to entry, the market price is determined by the intersection of the industry's supply and demand curves. At this price, the marginal cost to producers is equal to the marginal benefit to consumers, resulting in an efficient allocation of resources. Therefore, choice C is the correct answer. Firms do still maximize profits in a perfectly competitive industry, but this objective is aligned with producing at the allocatively efficient level. Choices A, B, D, and E do not accurately describe the conditions necessary for allocative efficiency in a perfectly competitive industry.

In the Absence of Market Failures, Allocative Efficiency Is Achieved