7.3.2—Efficiency conditions

The usual productive-efficiency condition is output at minimum average cost. The usual allocative-efficiency condition is price equal to marginal cost, because the value of the last unit equals the resource cost.

These are model conditions, not universal laws. Externalities require social rather than private marginal cost or benefit; public goods and information problems may prevent the simple market result.

If a factory’s minimum AC occurs at 1,000 units but its price is above MC at that output, it is productively efficient but allocatively inefficient in the basic model.

Do not apply P=MC mechanically when external costs, market power or non-price allocation means the relevant social curves differ from private curves.