Which of the following statements is true about allocative efficiency?

• A. Allocative efficiency requires that all individuals receive equal shares of output.
• B. Allocative efficiency occurs when resources are distributed in a way that maximizes total societal welfare.
• C. Allocative efficiency is unrelated to consumer preferences.
• D. Allocative efficiency is achieved when firms produce at the lowest possible average cost.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of allocative efficiency. Allocative efficiency occurs when resources are distributed in a way that maximizes total societal welfare, meaning goods and services are produced according to consumer preferences and marginal benefit equals marginal cost.
2. Step 2: Analyze the first statement: 'Allocative efficiency requires that all individuals receive equal shares of output.' This is incorrect because allocative efficiency focuses on maximizing welfare, not equal distribution.
3. Step 3: Analyze the second statement: 'Allocative efficiency occurs when resources are distributed in a way that maximizes total societal welfare.' This aligns with the definition of allocative efficiency and is therefore true.
4. Step 4: Analyze the third statement: 'Allocative efficiency is unrelated to consumer preferences.' This is false because allocative efficiency depends on producing goods and services that consumers value most, reflecting their preferences.
5. Step 5: Analyze the fourth statement: 'Allocative efficiency is achieved when firms produce at the lowest possible average cost.' This describes productive efficiency, not allocative efficiency, so it is incorrect.