Allocative efficiency

The paradigm of allocative efficiency assumes that producers are only supplying goods that the market wants, i.e. products that are in high demand. In mathematical terms, it is the point at which price is equal to the marginal cost (the cost of producing one more unit of particular produce). Some allocations are inherently better than others in terms of the net effect (the positives outweigh the negatives). It is usually defined using Pareto Optimality (or Superiority) – a situation where no person could be made better off without harming someone else.

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