Figure 12-3 Marginal Cost and Marginal Value in a Single Market
curve shows the marginal value to consumers; the market supply curve
shows the marginal cost to producers. At the level of output (the
outcome achieved if the price adjusts to clear the market) there is
allocative efficiency because marginal value is equal to the marginal
cost. At output there is too much X being produced because the
marginal cost exceeds the marginal value. At there is too little X being
produced because marginal value exceeds marginal cost. For the
economy as a whole, allocative efficiency occurs when output is and
thus marginal cost equals marginal value for all products in the economy
at the same time.
Allocative efficiency requires that the output of each product be such
that marginal cost in production equals marginal value in
consumption. In a single competitive market, the supply curve reflects
marginal cost to producers; the demand curve reflects marginal value to
consumers. At and so there is too much of this product. At
and so there is too little of this product. Only at is there
the efficient amount of X being produced and consumed. Allocative
efficiency for the economy as a whole requires that output be (with
) for all products at the same time.
Q∗(p∗)
Q 2 ,
Q 1 ,Q∗,Q 2 ,MC>MV
Q 1 ,MV >MC Q∗
Q∗
MC=MV