In a perfectly competitive market, the socially efficient level of output is achieved when

• A. Price equals marginal cost
• B. Price equals average total cost
• C. Price equals marginal benefit
• D. Price equals total cost

Answer: (A)

Allocative efficiency happens where the value society places on one more unit equals the cost of producing that unit. In a perfectly competitive market, the price buyers are willing to pay for an extra unit reflects that marginal benefit, and firms take price as given while producing where marginal cost equals marginal revenue. Since in perfect competition MR equals price, firms produce up to the point where MC = P. That makes P = MC the condition that equates the last unit’s value to its production cost, achieving the socially efficient level of output. If price were higher than marginal cost, more would be worth producing; if price were lower, producing less would be optimal. The option stating price equals average total cost describes productive efficiency (zero economic profit) rather than allocating resources to reflect true value, so it isn’t the right benchmark for allocative efficiency. The idea that price equals marginal benefit is related, because price reflects marginal benefit in this setting, but the clearest statement of the efficiency condition is P = MC.