NB(Q)
= B’(Q)
- C’(Q)
= 0Allocative Efficiency
Suppose pizzas provide total benefits of B(Q) and cost a total of C(Q), where Q is the quantity of pizzas. The optimal quantity of pizza production is achieved when the difference between the pizzas' total benefits and total costs is greatest. If we define the net benefits of pizza as NB(Q) = B(Q) -C(Q), allocative efficiency is achieved at the output which maximizes NB(Q).
To maximize, we differentiate and equate to zero.
NB(Q)
= B’(Q)
- C’(Q)
= 0
In words, maximum net benefit (allocative efficiency) is achieved when the marginal benefit minus the marginal cost of pizza is zero; or alternatively, when the marginal benefit of pizza equals its marginal cost.