are productively efficient. The two demand-and-supply diagrams show
the competitive markets for wheat and steel. These two diagrams are
positioned so that their output axes align with the appropriate axes from
the PPB diagram.
At point A, steel output is and wheat output is In the wheat
market, however, at the marginal value of wheat consumption
exceeds its marginal cost of production. Thus, society would be better off
if more wheat were produced. Similarly, at the marginal cost of steel
production exceeds its marginal value to consumers, and thus society
would be better off with less steel being produced.
Point A is therefore not allocatively efficient; there is too little wheat and
too much steel being produced. The argument is similar at point C, at
which there is too much wheat and too little steel being produced. Only
at point B is each good produced to the point where the marginal cost to
producers is equal to the marginal value to consumers. Only point B
allocatively efficient.
In Figure 12-4 , movements along the PPB can be easily “tracked” into
changes in the output of both wheat and steel. For example, a movement
from point A to point C along the PPB involves a large increase in wheat
output and also a large reduction in steel output. These changes are only
possible, of course, as the economy’s resources are transferred away from
the steel industry and toward the wheat industry.
What is the allocatively efficient combination of steel and wheat output in
this economy? Allocative efficiency will be achieved when in each market
the marginal cost of producing the good equals the marginal value of
consuming the good. In Figure 12-4 , allocative efficiency is achieved at
point B, with SB steel being produced and WB wheat being produced.
SA WA.
WA
SA