Under which condition is the regulated price considered allocatively efficient?

• A. When price equals average total cost (P = ATC)
• B. When price equals marginal cost (P = MC)
• C. When price is less than marginal cost (P < MC)
• D. When price is greater than marginal cost (P > MC)

Answer: (B)

Verified step by step guidance

1. Understand the concept of allocative efficiency: it occurs when the price consumers are willing to pay equals the marginal cost of producing the good, meaning resources are allocated optimally to maximize total welfare.
2. Recall that marginal cost (MC) represents the cost of producing one additional unit of a good, while price (P) reflects the value consumers place on that unit.
3. Recognize that when \(P = MC\), the quantity produced and consumed is socially optimal because the cost of producing the last unit equals the benefit to consumers.
4. Contrast this with other conditions: if \(P > MC\), the good is underproduced (deadweight loss occurs), and if \(P < MC\), the good is overproduced, leading to inefficiency.
5. Therefore, the condition for allocative efficiency in a regulated price setting is when \(P = MC\).