How is allocative efficiency related to a free market economy?

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In a free market economy, supply and demand are able to adjust through the price-signaling mechanism to achieve allocative efficiency, in which the price is equal to the marginal cost of production.

It is allocatively efficient because consumers pay what the good is worth to them. If at an output level of 1,000 and a marginal cost of $10, consumers would be willing to pay $15; it would be allocatively efficient to increase output to lower the marginal cost and expand the availability of the good. The business would have higher profit margins and consumers would have...

(The entire section contains 2 answers and 280 words.)

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