Naturally, all else being equal, any society would prefer that its resources be allocated or distributed among their various uses in an efficient manner. This is what we mean by allocative efficiency. Resources are distributed efficiently when the marginal benefit of the last unit produced of each good or service equals the marginal cost of production.

A society is producing an efficient amount of soda if the cost to society of producing the last soda (MC_S) is equal to the benefit to the society of that soda (MB_S). If this weren't true the society could be made better off. For example, if MC_S < MB_S too little is being produced. The added benefit of producing more soda outweighs the added cost, so society would be better off if more were produced. If MC_S > MB_S production should be reduced because the cost savings would outweigh the benefit reduction.

Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved