Answer to Question #67071 in Microeconomics for Lisa

Question

What market structure is used to benchmark allocative efficiency and why do we use it? Illustrate and explain.

Answer 1

Such market structure as perfect competition is used to benchmark allocative efficiency, because when conditions of perfect competition hold, it has been proven that a market will reach an equilibrium in which the quantity supplied for every product or service, including labor, equals the quantity demanded at the current price. This equilibrium will be a Pareto optimum, meaning that nobody can be made better off by exchange without making someone else worse off.

Reference:
https://en.wikipedia.org/wiki/Perfect_competition