In perfect competition if firms produce where P=MC they ensure allocative efficiency because the social benefits of production as measured by the price that people are willing to pay, are in balance with the marginal costs
to society of that production.
Option B
<u>Explanation:
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Allocation efficiency means that the selected item is favored socially, at least in a common and unique context, among the levels at the production choice limit.
It is useful to look at a good example and figure out what analysts mean by allocative efficiency.
Suppose the retail flora market is perfectly efficient, and therefore P= MC. What this would mean if businesses produced a smaller amount of floral on that market. Marginal costs have not risen to a lower level and will thus surpass the marginal cost, P > MC.
While perfectly competitive companies achieve an income possible by generating the quantity of P = MC, they must guarantee that the benefits for the buyers of what they produce are equal to the prices to be paid by the disadvantaged unit production system, as determined by the marginal cost of the company to pay.
