It is not enough for products to be produced at the lowest possible cost. The right products must also be produced if there is to be economic efficiency

Allocative efficiency is a situation where the current combination of goods produced and sold gives the maximum satisfaction for each consumer at their current levels of income.

Competitive firms are allocatively efficient

This means that they produce the goods and services that consumers most greatly desire to consume.

Allocative efficiency can also be achieved in a free market as firms will distribute goods and services to consumers in an optimal way.