Answer:
The market price of a good equates THE MARGINAL cost of production and the MARGINAL value that consumers attach to a unit of the good. Because the price also reflects the OPPORTUNITY cost of the resources employed to produce the last unit, consumers will value the last unit they purchase at least as much as they would value any other good that those resources could have produced. These characteristics of perfectly competitive markets guarantee ALLOCATIVE efficiency.
Explanation:
In a competitive market, the price of a good should equal the marginal cost of production of that good.
Since the marginal utility that consumers obtain from consuming goods is decreasing, they will be willing to pay only the marginal price that provides the highest utility per dollar spent.
The comparative approach to trade, states that the cost of producing one more good equals the opportunity cost of not producing other goods.
Allocative efficiency refers to the economy producing what consumers need, want and prefer, not only what the economy can produce more efficiently.
