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Allocative Efficiency

Scarcity is a central concept in the allocation and organization of resources in an economy. If a society had an infinite amount of everything, there would be no need to choose between different resource uses. There are various ways in which resources can be allocated to different outcomes for different individuals in terms of gains and losses. Allocative efficiency occurs when markets optimally distribute goods and services taking into account consumers’ preferences, so that the level of output demanded by society is satisfied by the firms in the market. Allocative efficiency represents the optimum production and consumption point when the benefit of an extra unit of a good consumed is equal to the cost of producing it. Allocative efficiency is an important issue in the ...

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