📚 Learning Guide
Allocative Efficiency and Pricing
easy

Which of the following conditions indicate that a municipality has achieved allocative efficiency in pricing a public bridge? Select all that apply.

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Choose the Best Answer

A

The price charged reflects the marginal cost of using the bridge.

B

The price is set significantly above consumer willingness to pay.

C

Consumer surplus is maximized at the given price level.

D

The quantity of users is less than the optimal level for efficiency.

E

The price covers the total cost of maintaining the bridge.

Understanding the Answer

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Answer

Allocative efficiency in pricing a public bridge means that the price charged for using the bridge reflects the true value of the service to the users. This happens when the cost of maintaining and operating the bridge is equal to the benefits that users receive from it. For example, if a bridge costs $5 to cross and the users value crossing it at exactly $5, then allocative efficiency is achieved because the price matches the benefit to the users. Additionally, if the bridge is used by enough people who are willing to pay this price, it shows that the resource is being used effectively. In summary, allocative efficiency is indicated when the price equals the value of the service to the users, ensuring that resources are allocated where they are most needed.

Detailed Explanation

Other options are incorrect because The price should equal the cost of adding one more user; Setting a high price means fewer people can afford it.

Key Concepts

Allocative Efficiency
Marginal Cost
Consumer Surplus
Topic

Allocative Efficiency and Pricing

Difficulty

easy level question

Cognitive Level

understand

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