12.1 Productive and Allocative
Efficiency LO 1, 2
Productive efficiency for the firm requires that the firm be producing
its output at the lowest possible cost. Productive efficiency for the
industry requires that all firms in the industry have the same marginal
cost.
Allocative efficiency in an individual industry exists when the level of
output is such that the marginal cost of production equals the market
price. The overall economy is allocatively efficient when price equals
marginal cost in all industries simultaneously.
Equivalently, we say that allocative efficiency occurs if and when total
surplus (consumer plus producer) is maximized.
Productive efficiency and allocative efficiency are both achieved in
perfect competition.
Imperfect competition is generally allocatively inefficient because
price exceeds marginal cost, implying a deadweight loss for the
economy.