Figure 12-6 The Allocative Efficiency of Perfect Competition
Allocative efficiency occurs at the level of output where the sum of consumer and producer
surplus is maximized.In a perfectly competitive market, the allocatively efficient level of output
occurs where the demand and supply curves intersect—that is, at
equilibrium. This level of output is shown at in Figure 12-6. For any
level of output below the demand curve lies above the supply curve,
which tells us (1) that consumers value an extra unit of the product more
than it costs to produce it, and (2) that society is better off if more of that
product is produced.
Competitive equilibrium is allocatively efficient because it maximizes
the sum of consumer and producer surplus. The competitive
equilibrium occurs at the price–output combination of and At this
equilibrium, consumer surplus is the shaded area above the price line,
while producer surplus is the shaded area below the price line.
For any output that is less than the sum of the two surpluses is less
than at For any output that is greater than the sum of the
surpluses is also less than at Thus, total surplus is maximized when
output is
Q∗
Q∗,p∗ Q∗.Q∗,
Q∗. Q∗,
Q∗.
Q∗.