<p>allocative efficiency occurs whenever total market surplus is maximized. This occurs whenever price is equal to the ‘free market’ equilibrium price. There is no surplus of goods at this equilibrium price. There is no DWL at this equilibrium. If there exists DWL, the market is not operating at the 'free market' (as phrased in a comment below) or the ‘unfettered’ equilibrium and the market is not allocatively efficient. To be clear, this market will still operate at some equilibrium. However, this equilibrium will not be efficient. </p>

CC BY-SA 4.0
2020-03-31T01:58:54.150Z
Thanks a lot. There won't be a point of market equilibrium when there is a DWL, right?
Christopher U
CC BY-SA 4.0
2020-03-31T01:59:50.867Z
There is still presumably a point of market equilibrium (defined by the equilibrium price and quantity) but the market is not operating at that equilibrium.
123
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2020-03-31T02:02:18.117Z
For example, consider a market wherein a government implements a price ceiling below the equilibrium price. This market will not operate at the equilibrium, even though there is an equilibrium price. If the government removed the price ceiling, the market would converge to the equilibrium.
123
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2020-03-31T03:05:26.420Z
But if a subsidy is placed on the good, won't the market be operating where price = equilibrium price? So would that be considered allocatively efficient?
Christopher U
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2020-03-31T05:05:09.247Z
"*If there exists DWL, the market is not in equilibrium*" This is not true, at least not according to most definitions of the word equilibrium. Perhaps you mean that the market is not in the "free market" equilibrium where no taxes exist?
Giskard
CC BY-SA 4.0
2020-03-31T05:31:10.743Z
Yes. I took that as as implicit assumption of the post based on how the original poster discussed the addition of a subsidy and seems to watch to compare a market with a subsidy to a 'free' or 'perfect' market. So the market will not be at the free-market equilibrium. Of course it can still reach some other equilibrium...namely the equilibrium prices and quantities under some distortionary tax, some subsidy, some ceiling, etc.
123
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2020-04-01T04:44:25.053Z
Good lord. I just realized how many typos there are in that comment. My apologies.
123
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2020-04-02T08:01:37.230Z
@123 just reading over this again. You said in the answer that price is equal to equilibrium price for allocative efficiency. But in the case of a subsidy, would it also be operating where price is equal to equilibrium price?
Christopher U
CC BY-SA 4.0
2020-04-03T00:30:25.297Z
Allocative efficiency of p,Q are at the p*,Q* that correspond to ‘free market’ equilibrium.
123
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2020-03-31T01:46:08.257Z
2020-04-03T00:31:34.837Z
2020-04-03T00:31:34.837Z
123
<p>An <a href="https://www.nzqa.govt.nz/nqfdocs/ncea-resource/schedules/2017/91399-ass-2017.pdf" rel="nofollow noreferrer">answer schedule</a> for a practice exam I am doing states that when a subsidy is placed on a a good by the government, there is a loss of allocative efficiency.</p>

<p>I have also learnt <a href="https://www.youtube.com/watch?v=5EA64mamJWE" rel="nofollow noreferrer">from this video</a> that when supply and demand change, the market will still be allocatively efficient, although the amount of consumer and producer surplus will change. However, the video does not take into account dead-weight loss.</p>

<p>When a subsidy is placed on a good by the government, there is obviously a loss in welfare due to the dead weight loss. By my question is this: is there still a point of allocative efficiency in the market of a good with a subsidy, or is there no longer allocative efficiency at all when there is a dead weight loss? </p>

<p><a href="https://i.sstatic.net/2gyqC.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/2gyqC.png" alt="enter image description here"></a></p>

CC BY-SA 4.0
2020-03-31T01:44:36.497Z
Are you asking about the existence of consumer and producer surplus when a market is allocatively efficient? Or can a market where there is a surplus of goods be allocatively efficient?
123
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2020-03-31T01:47:47.923Z
@123 yep the second one
Christopher U
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2020-03-31T01:50:51.560Z
K. I think I managed an answer that gives insight to both :)
123
<resource-allocation>
Is there still allocative efficiency when a subsidy is placed on a good?
Christopher U
# Is there still allocative efficiency when a subsidy is placed on a good?

(Asked by: username_0 on 2020-03-31)

An [answer schedule](https://www.nzqa.govt.nz/nqfdocs/ncea-resource/schedules/2017/91399-ass-2017.pdf) for a practice exam I am doing states that when a subsidy is placed on a a good by the government, there is a loss of allocative efficiency.

I have also learnt [from this video](https://www.youtube.com/watch?v=5EA64mamJWE) that when supply and demand change, the market will still be allocatively efficient, although the amount of consumer and producer surplus will change. However, the video does not take into account dead-weight loss.

When a subsidy is placed on a good by the government, there is obviously a loss in welfare due to the dead weight loss. By my question is this: is there still a point of allocative efficiency in the market of a good with a subsidy, or is there no longer allocative efficiency at all when there is a dead weight loss?

[![enter image description here](https://i.sstatic.net/2gyqC.png)](https://i.sstatic.net/2gyqC.png)

**Tags:** resource-allocation

> **Comments:**
> **username_1**: Are you asking about the existence of consumer and producer surplus when a market is allocatively efficient? Or can a market where there is a surplus of goods be allocatively efficient?  
> **username_0**: @username_1 yep the second one  
> **username_1**: K. I think I managed an answer that gives insight to both :)  

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## 1 answers

### Answer by username_1 on 2020-03-31. Score: 3 | Accepted answer

allocative efficiency occurs whenever total market surplus is maximized. This occurs whenever price is equal to the ‘free market’ equilibrium price. There is no surplus of goods at this equilibrium price. There is no DWL at this equilibrium. If there exists DWL, the market is not operating at the 'free market' (as phrased in a comment below) or the ‘unfettered’ equilibrium and the market is not allocatively efficient. To be clear, this market will still operate at some equilibrium. However, this equilibrium will not be efficient.

> **Comments:**
> **username_0**: Thanks a lot. There won't be a point of market equilibrium when there is a DWL, right?  
> **username_1**: There is still presumably a point of market equilibrium (defined by the equilibrium price and quantity) but the market is not operating at that equilibrium.  
> **username_1**: For example, consider a market wherein a government implements a price ceiling below the equilibrium price. This market will not operate at the equilibrium, even though there is an equilibrium price. If the government removed the price ceiling, the market would converge to the equilibrium.  
> **username_0**: But if a subsidy is placed on the good, won't the market be operating where price = equilibrium price? So would that be considered allocatively efficient?  
> **username_2**: "*If there exists DWL, the market is not in equilibrium*" This is not true, at least not according to most definitions of the word equilibrium. Perhaps you mean that the market is not in the "free market" equilibrium where no taxes exist?  
> **username_1**: Yes. I took that as as implicit assumption of the post based on how the original poster discussed the addition of a subsidy and seems to watch to compare a market with a subsidy to a 'free' or 'perfect' market. So the market will not be at the free-market equilibrium. Of course it can still reach some other equilibrium...namely the equilibrium prices and quantities under some distortionary tax, some subsidy, some ceiling, etc.  
> **username_1**: Good lord. I just realized how many typos there are in that comment. My apologies.  
> **username_0**: @username_1 just reading over this again. You said in the answer that price is equal to equilibrium price for allocative efficiency. But in the case of a subsidy, would it also be operating where price is equal to equilibrium price?  
> **username_1**: Allocative efficiency of p,Q are at the p*,Q* that correspond to ‘free market’ equilibrium.  

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