In the absence of market failures, allocative efficiency is achieved only under perfect competition because only this market structure results in
A) productive efficiency.
B) P = MC.
C) complete freedom of entry and exit.
D) zero long- run profits.
E) maximization of profits through competition.

Question

Quizplus · Accepted Answer

Allocative efficiency occurs when resources are allocated in a way that maximizes social welfare, which is achieved when P = MC. Only perfect competition guarantees this outcome because in a perfectly competitive market, firms have no market power and they take the price as given. As a result, firms produce at the point where P = MC, which is also the point where marginal benefit equals marginal cost, generating the highest level of consumer surplus. In this context, allocative efficiency is achieved by perfect competition without any market failures.

In the Absence of Market Failures, Allocative Efficiency Is Achieved