Allocative efficiency implies which relationship between marginal social benefit and marginal social cost?

Allocative efficiency implies which relationship between marginal social benefit and marginal social cost?

• A. MSB > MSC; allocative efficiency is achieved
• B. MSB = MSC; allocative efficiency is achieved
• C. MSC > MSB; leads to under-production
• D. MSB < MSC; leads to misallocation

Answer: (B)

Allocative efficiency happens when the social benefit from one more unit exactly equals the social cost of producing that unit. The marginal social benefit (MSB) is the extra benefit to society from an additional unit, and the marginal social cost (MSC) is the extra cost to society of that unit. When MSB equals MSC, the last unit produced adds zero net social welfare, so resources are used in the most valuable way. If MSB is greater than MSC, producing more would raise welfare, so more output would be efficient; if MSC is greater than MSB, producing more would lower welfare, so less output is better. Accounting for externalities, MSB and MSC should reflect all private and external effects, which is why equality is the condition for allocative efficiency.

Allocative efficiency happens when the social benefit from one more unit exactly equals the social cost of producing that unit. The marginal social benefit (MSB) is the extra benefit to society from an additional unit, and the marginal social cost (MSC) is the extra cost to society of that unit. When MSB equals MSC, the last unit produced adds zero net social welfare, so resources are used in the most valuable way. If MSB is greater than MSC, producing more would raise welfare, so more output would be efficient; if MSC is greater than MSB, producing more would lower welfare, so less output is better. Accounting for externalities, MSB and MSC should reflect all private and external effects, which is why equality is the condition for allocative efficiency.