In a perfectly competitive market, allocative efficiency is achieved when:

• A. P > MC
• B. P = MC
• C. MSC = MB
• D. MB > MC

Answer: (B)

Allocative efficiency means producing the exact quantity where the value of the last unit to consumers equals the cost of producing it. In a perfectly competitive market, the price reflects the marginal benefit to consumers, and firms produce where that price equals the marginal cost of production. Since price equals marginal benefit (P = MB) and price also equals marginal cost (P = MC) in this setting, the condition MB = MC is satisfied. That alignment means resources aren’t wasted on over- or under-producing any goods. The given scenario thus achieves allocative efficiency when P = MC. If externalities were present, the criterion would shift to MSC = MB, but without external effects, P = MC captures the efficient outcome.