Alright. So now let's discuss the idea of allocative efficiency, and remember that allocative efficiency is the idea that production represents our consumer preferences, right? What the consumers want is what is being produced, and we're producing the right amount for our consumers. We see that our condition here is where the marginal benefit to the consumers equals the marginal cost to producers. So we're going to produce up to the point where marginal benefit equals marginal cost, and that is where we have allocative efficiency.
Let's see how we're not reaching allocative efficiency. First, let's think about the marginal benefit. The marginal benefit is represented by the demand curve, right? That's the benefits that the consumers receive. And the marginal cost comes from our marginal cost curve. We have a marginal cost curve on the graph, and that's where that comes from, but firms produce where marginal revenue equals marginal cost, right? Marginal revenue equals marginal cost; that's profit-maximizing, and that's what they're concerned with. They want to maximize their profit, but that is not where the marginal cost and demand curve intersect. If we were going to find the allocative efficiency point, that would be where the demand curve intersects the marginal cost curve. This is the marginal benefit; this is the marginal cost; those would be allocative efficiency where those cross, and if we go back up to our graph here, we're not producing at this quantity, right, where the demand and marginal cost are equal. This point right here where the demand and marginal cost are equal would be the allocatively efficient quantity, right? And we're not producing there; we're producing some lower quantity to increase our profit.
That is why we're not being allocatively efficient. The marginal benefits to the demand curve. That's the marginal benefit to the consumer. Here on the demand curve. That's the marginal benefit to the consumer, and the marginal cost to the producer is down here. You can see that the marginal benefit is greater than the marginal cost at that point, so we should have produced more units if we were being socially efficient there.
That is why we don't reach productive nor allocative efficiency in monopolistic competition. So let's go ahead and move on to the next video.