📚 Learning Guide
Allocative Efficiency and Pricing
hard

If a municipality sets the price of a bridge to achieve allocative efficiency, which of the following outcomes is most likely to occur?

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Choose the Best Answer

A

The price equals the marginal cost, maximizing total surplus.

B

The price is set above marginal cost, leading to increased producer surplus.

C

The price is set below marginal cost, increasing consumer surplus.

D

The price fluctuates based on demand, ignoring marginal costs.

Understanding the Answer

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Answer

When a municipality sets the price of a bridge to achieve allocative efficiency, it means the price reflects the true cost of using the bridge, including both the resources needed to build and maintain it and the benefits to users. This pricing helps ensure that the people who value the bridge the most, and are willing to pay for it, are the ones who use it. For example, if the price is set at a level where the number of cars crossing the bridge matches the cost of maintaining it, then the bridge is used efficiently without overcrowding or waste of resources. This outcome encourages fair usage, where those who benefit from the bridge contribute to its costs, ultimately leading to better management of public resources. In this way, allocative efficiency helps balance the needs of the community with the costs involved.

Detailed Explanation

When the price of the bridge equals the marginal cost, it means the cost to build one more bridge is the same as the price charged. Other options are incorrect because Setting the price above the marginal cost means charging more than what it costs to provide the bridge; If the price is below the marginal cost, the bridge might not be sustainable.

Key Concepts

Allocative Efficiency
Marginal Cost
Market Pricing Strategies
Topic

Allocative Efficiency and Pricing

Difficulty

hard level question

Cognitive Level

understand

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