Productive Efficiency - goods are produced in the least costly way.
Allocative Efficiency – where the right amount (according to society) is produced.
Allocative Efficiency P = MC , MC = P
· Money price is society’s measure of the relative worth of the unit. (price is the benefit)
· An additional unit of a products value must include what could possibly have been made (opportunity cost)
If price is equal to marginal cost then the right goods (according to society) are being produced.
Under-allocation P > MC , MC < P
If price is more than the marginal cost there is an underproduction of goods (society wants more). Society values more of what is being produced than what could alternatively be produced with the same resources.
Over-allocation P < MC , MC > P
If price is less than marginal cost there is an overproduction of goods (society wants less). Society values what could be produced alternatively than how the resources are being presently used.