Question

If a production quota is set lower than the equilibrium quantity, at the quota quantity, marginal benefit is ________ marginal cost and the quantity produced is allocative ________.

Answer 1

If a production quota is set lower than the equilibrium quantity, at the quota quantity, the marginal benefit is greater marginal cost and the quantity produced is allocative greater.

If marginal benefit exceeds marginal cost, resources use will be more efficient if the quantity is increased. If marginal cost exceeds marginal benefit, resource use will be more efficiently if the quantity is increased.

Allocative efficiency occurs where the collective sum of consumer and producer surplus is at a maximum. When the marginal benefits exceed the marginal costs of producing a product, then allocative efficiency is not achieved in the market.

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