Socially Optimum Output / Allocative Efficiency

As we know from 2.3, Allocative Efficiency is the condition where social surplus is maximized. 

• Neither consumer nor producer surplus can increase without the other one decreasing more.

Allocative Efficiency is where equilibrium meets at the Socially Optimum Output.

• At this point, the added benefits for society (Marginal Social Benefits) equal the added costs for society (Marginal Social Costs). 

  • • By "social", it means the combination of consumers and producers. So the socially optimum output is where the combined value of consumer and producer surplus is the largest.

    • This happens at the optimal price and optimal quantity (Popt and Qopt)

Allocative Efficiency Diagram (AO4)