Allocative efficiency

draw a costs and benefits diagram

What are the factors of social cost

What are the factors of social benefit

private cost + external costs

Private benefit + external benefit

What are external costs

Costs to the third party

What must be achieved for allocative efficiency

Maximisation of society welfare (producer surplus + consumer surplus)

Resources perfectly satisfy consumer demand

Net social benefit is maximised (MSB=MSC)

What do we assume if the market equilibrium is allocatively efficient

Many buyers and sellers

No barriers to entry

Consumers maximise utility

Producers maximise profits

Perfect information

Where is social equilibrium

Where is private equlibrium

MSB = MSC

MPB = MPC