Allocative efficiency occurs when marginal benefit equals marginal cost. Which statement best describes the outcome?

Allocative efficiency occurs when marginal benefit equals marginal cost. Which statement best describes the outcome?

• A. It minimizes total welfare
• B. It maximizes total welfare
• C. It makes marginal cost zero
• D. It guarantees full employment

Answer: (B)

Allocative efficiency is about matching production to what people value, so resources are used where they create the most value. When the benefit society gets from one more unit (marginal benefit) just equals the cost of producing that unit (marginal cost), you're at the point where changing the quantity would reduce total welfare. If you produced more, the extra costs would exceed the extra benefits; if you produced less, you'd be forgoing benefits that exceed costs. So, at MB = MC, total welfare—the sum of consumer and producer gains—is maximized. This is not about zero marginal cost or full employment; it’s about getting the right quantity and mix of goods given resource limits.

Allocative efficiency is about matching production to what people value, so resources are used where they create the most value. When the benefit society gets from one more unit (marginal benefit) just equals the cost of producing that unit (marginal cost), you're at the point where changing the quantity would reduce total welfare. If you produced more, the extra costs would exceed the extra benefits; if you produced less, you'd be forgoing benefits that exceed costs. So, at MB = MC, total welfare—the sum of consumer and producer gains—is maximized. This is not about zero marginal cost or full employment; it’s about getting the right quantity and mix of goods given resource limits.