In economics, what condition describes an allocation where the price of a good equals its marginal cost?

In economics, an allocation where the price of a good equals its marginal cost is called allocative efficiency.

Allocative efficiency means resources are directed toward the goods and services consumers value most, given the available technology and resources. In a simplified competitive-market model, firms produce where price equals marginal cost, so the value buyers place on the last unit matches the cost of the resources used to make it.

This condition differs from productive efficiency. Productive efficiency concerns producing at the lowest possible average cost, whereas allocative efficiency concerns producing the combination and quantity that best reflects preferences and opportunity costs. A market can therefore be productively efficient without being allocatively efficient.

Taxes, market power, pollution, and other externalities can cause price to diverge from the full marginal cost to society. In those cases, the market outcome may not maximize total economic surplus, even when buyers and sellers freely trade.