Which of the following most accurately describes allocative efficiency?

• A. Income and wealth are distributed equally among all members of society.
• B. Resources are distributed in a way that maximizes total societal welfare, where marginal benefit equals marginal cost.
• C. Markets operate without any government intervention.
• D. Firms produce goods at the lowest possible average cost.

Answer: (B)

Verified step by step guidance

1. Understand the concept of allocative efficiency: it occurs when resources are allocated in a way that maximizes total societal welfare.
2. Recall that allocative efficiency is achieved when the marginal benefit (MB) of a good or service equals its marginal cost (MC), meaning the value consumers place on the last unit produced equals the cost of producing it.
3. Recognize that allocative efficiency focuses on the optimal distribution of resources to produce the right mix of goods and services desired by society, rather than on equality of income or cost minimization alone.
4. Compare the given options to the definition: income equality relates to equity, government intervention relates to market structure, and lowest average cost relates to productive efficiency, not allocative efficiency.
5. Conclude that the option stating 'Resources are distributed in a way that maximizes total societal welfare, where marginal benefit equals marginal cost' best describes allocative efficiency.