Efficient resource allocation occurs when resources are allocated to their highest use. There is no alternative to using them further without making the others worse.
In economics, resource allocation is efficient when the market operates perfectly competitive. In this market, the price of goods and services equals the marginal cost of the producer. Price represents the consumer’s willingness to pay for a good or service. Meanwhile, marginal cost is the extra cost by producing one additional unit of a product or service.
However, in the real world, in the long run, perfect competition is only a benchmark for hypotheses. We rarely see it. Most markets operate in imperfect competition, whether it is a monopoly, oligopoly, or monopolistic competition. In imperfectly competitive markets, producers will not always set prices the same as marginal costs. Thus, in these market structures, the market does not allocate resources efficiently. The cause can occur due to problems such as pollution, the discovery of new technology, and price control by the government, discrimination in the labor market, and imperfect information.
