produced. This can be shown by an upsloping MC curve, as in Figure 2-2. We also know that we obtain extra or marginal benefits (MB) from additional units of pizzas. However, although material wants in the aggregate are insatiable, studies reveal that the second unit of a particular product yields less additional benefit to a person than the first. And a third provides even less MB than the second. So it is for society as a whole. We therefore can portray the marginal benefits from pizzas with a downsloping MB curve, as in Figure 2-2. Although total benefits rise when society consumes more pizzas, marginal benefits decline.
The optimal quantity of pizza production is indicated by the intersection of the MB and MC curves: 200,000 units in Figure 2-2. Why is this the optimal quantity? If only 100,000 pizzas were produced, the marginal benefit of pizzas would exceed its marginal cost. In money terms, MB might be $15, while MC is only $5. This suggests that society would be underallocating resources to pizza production and that more of it should be produced.
How do we know? Because society values an additional pizza as being worth $15, while the alternative products that those resources could produce are worth only $5. Society benefits whenever it can gain something valued $15 by forgoing something valued only $5. Society would use its resources more efficiently by allocating more resources to pizza. Each additional pizza up to 200,000 would provide such a gain, indicating that allocative efficiency would be improved by that production. But when MB = MC, the benefits of producing pizzas or alternative products with the available resources are equal. Allocative efficiency is achieved where MB = MC.
The production of 00,000 pizzas would represent an overallocation of resources to pizza production. Here the MC of pizzas is $15 and its MB is only $5. This means that 1 unit of pizza is worth only $5 to society, while the alternative products that those resources could otherwise produce are valued at $15. By producing 1 less unit, society loses a pizza worth $5. But by reallocating the freed resources, it gains other products worth $15. When society gains something worth $15 by forgoing some-
Allocative efficiency requires the expansion of a good's output until its marginal benefit (MB) and marginal cost (MC) are equal. No resources beyond that point should get allocated to the product. Here, allocative efficiency occurs when 200,000 pizzas are produced.
ALLOCATIVE EFFICIENCY: MB = MC
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