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Chapter 8: Q.29 (page 212)

Will a perfectly competitive market display allocative efficiency? Why or why not?

Short Answer

Expert verified

Yes, in a completely competitive market, allocative efficiency stays true.

Step by step solution

01

Allocative efficiency :

The locations on the production possibility curve that are not representing proper resource usage but are socially advantageous, with social cost and benefit being equal.

02

Explanation :

Profits are maximised in a completely competitive market when the price equals the marginal cost. The MC is the social cost of production, and the price is paid in exchange for a social benefit gained from the good. That is, profits are highest when social cost equals social benefit.

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