goods at the lowest possible average cost.

Allocative efficiency means that among the points on the production possibility frontier, the chosen point is

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8.4 • Efficiency in Perfectly Competitive Markets 207

socially preferred—at least in a particular and specific sense. In a perfectly competitive market, price will be

equal to the marginal cost of production. Think about the price that one pays for a good as a measure of the

social benefit one receives for that good; after all, willingness to pay conveys what the good is worth to a buyer.

Then think about the marginal cost of producing the good as representing not just the cost for the firm, but

more broadly as the social cost of producing that good. When perfectly competitive firms follow the rule that

profits are maximized by producing at the quantity where price is equal to marginal cost, they are thus
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