Allocative Efficiency and Total Surplus
We have now examined allocative efficiency using the concepts of
marginal value to consumers and marginal cost to producers. We have
established that allocative efficiency is achieved in the economy when
marginal cost is equal to marginal value (price) in each industry. We now
describe allocative efficiency again, but this time using the concepts of
consumer and producer surplus, both of which are part of the economic
surplus we first introduced in Chapters 5 and 6. In Chapter 5 we
used the term “market efficiency” to describe the situation where total
economic surplus is maximized. The market efficiency from Chapter
and the allocative efficiency we have just introduced are exactly the same
thing. Now that we have made the distinction between productive and
allocative efficiency we will continue to use this terminology as we carry
on.
Let’s now examine more closely the relationship between allocative
efficiency and economic surplus. We begin with consumer and producer
surplus.
Consumer and Producer Surplus
Recall from Chapter 6 that consumer surplus is the difference between
the value that consumers place on a product and the payment that they
actually make to buy that product. In Figure 12-5 , if the competitive