4 What is allocative efficiency and how does it relate to the production possibilities frontier? At any point on the PPF, we cannot produce more of one good without giving up some other good. At the best point on the PPF, we cannot produce more of one good without giving up some other good that provides greater benefit. We are producing at the point of allocative efficiency – the point on the PPF that we prefer above all other points.

Suppose in Figure 2.4 , we produce 1.5 million pizzas.

The marginal cost of a pizza is 2 cans of cola and the marginal benefit from a pizza is 4 cans of cola. Because someone values an additional pizza more highly than it costs to produce, we can get more value from our resources by moving some of them out of producing cola and into producing pizzas.