Allocative efficiency is defined as

• A. Achieving productive efficiency
• B. Maximizing total profits
• C. Producing the optimal quantity of some output
• D. Producing the maximum quantity of output

Answer: (C)

Allocative efficiency is achieved when the quantity produced of a good is the one that society values most, meaning the benefit from one more unit equals the cost of producing that unit. This is the optimal quantity where marginal benefit equals marginal cost: producing more would add more cost than benefit, and producing less would leave additional value untapped. So the defining idea is producing the optimal quantity of some output. The other ideas describe producing at the lowest possible cost for a given output (productive efficiency), maximizing profits for a firm, or producing the maximum possible output, none of which capture the balance between value and cost that allocative efficiency requires.