Allocative efficiency is the state of a economy in which production is aligned with consumer preferences; in particular, every return or utility is presented up to the item where the last unit enables a marginal benefit to consumers represent to the marginal exist of producing.
Allocation efficiency occurs when there is an optimal distribution of goods together with services, considering consumer’s preference. When the price equals marginal cost of production, the allocation efficiency is at the output level. This is because the optimal distribution is achieved when the marginal utility of good equals the marginal cost. The price that consumer is willing to pay is same as the marginal utility of the consumer.
From the graph we can see that at the output of 40, the marginal cost of good is $6 while the price that consumer is willing to pay is $15. It means the marginal utility of the consumer is higher than the marginal cost. The optimal level of the output is 70, where the marginal cost equals to marginal utility. At the output of 40, this product or service is under-consumed by the society. By increasing the output to 70, the price will fall to $11. Meanwhile, the society would benefit from consuming more of the good or service.
With the market power, the monopoly can put the price to cause the super normal profit. The monopolies can family the price above the marginal cost of the production. In this case, the allocation is not efficient. It results in the dead weight welfare damage to the society as a whole. In real life, the government's intervention policy to monopoly enterprises will affect the allocation efficiency. Large-scale downstream companies with more professionals such as lawyers and surveyors or better products are loosely more competitive than other companies. The wholesale prices they receive are much lower than those of their competitors. it is conducive to enhancement the efficiency of allocation. Ind erst & Shaffer 2009 found that banning prices would reduce allocation efficiency and lead to higher wholesale prices for all enterprises. More importantly, social welfare, industry profits, and consumer surplus will any be reduced.