Which of the following is likely to result in allocative inefficiency?

• A. Perfect competition in all markets
• B. Resources being allocated according to consumer preferences
• C. A government-imposed price ceiling that is set below the equilibrium price
• D. Firms producing at the lowest possible average cost

Answer: (C)

Verified step by step guidance

1. Understand the concept of allocative efficiency: it occurs when resources are distributed in a way that maximizes consumer satisfaction, meaning goods are produced up to the point where the price equals the marginal cost (\(P = MC\)).
2. Analyze each option in terms of allocative efficiency: Perfect competition typically leads to allocative efficiency because firms produce where \(P = MC\).
3. Consider resource allocation according to consumer preferences: this implies that resources are directed to produce goods that consumers value most, which supports allocative efficiency.
4. Examine the effect of a government-imposed price ceiling below the equilibrium price: this creates a shortage because the quantity demanded exceeds quantity supplied, leading to a misallocation of resources and thus allocative inefficiency.
5. Look at firms producing at the lowest possible average cost: this relates to productive efficiency, which is necessary but not sufficient alone for allocative efficiency.