Long-run competitive equilibrium (Entry, Exit and the Long Run) has two special features. Each matches a kind of efficiency, and the first is the same total-surplus idea as in Total Surplus and Deadweight Loss.
Key idea
Allocative efficiency: $P = MC$. The value buyers put on the last unit (the price) equals the cost of making it, so the right amount is produced and total surplus is as large as it can be. Productive efficiency: production at minimum ATC, the lowest possible cost per unit. In long-run equilibrium, perfect competition achieves both.
Why it works
If $P > MC$, someone values one more unit more than it costs to make, so producing it would add surplus: too little is being made. If $P < MC$, the last unit cost more than it is worth: too much. Only at $P = MC$ is there no gain left. Productive efficiency is about cost: at the bottom of ATC, the goods are made with the fewest resources per unit. Competitive firms set $P = MC$ to maximize profit, and entry pushes $P$ down to minimum ATC, so both happen without anyone planning them.
Worked example: Check both conditions
A firm sells at \$15. At its output, MC is \$15 and ATC is \$18, while its minimum ATC is \$14. Is it allocatively efficient? Productively efficient?
- $P = MC = \$15$: allocatively efficient.
- ATC at its output (\$18) is above the minimum (\$14): not productively efficient.
- It also has a loss of \$3 per unit, so in the long run firms will exit.
Answer: Allocatively efficient, but not productively efficient.
Worked example: Efficiency is not fairness
A market reaches the competitive outcome. Does that make the outcome fair?
- Efficiency is about the size of the total gain.
- Fairness is about how gains are shared; a market can be efficient while some people end up with very little.
- Whether and how to redistribute is a normative question.
Answer: Not necessarily: efficient and fair are different questions.
Common mistake
Mixing up the two conditions, or thinking an efficient outcome must also be fair. Allocative means $P = MC$ (the right amount); productive means minimum ATC (the cheapest way). Check: name the comparison. Price against marginal cost, or average cost against its minimum.