In any competitive market, such as illustrated in Figure 8-1 1, the area above the market price line and below the DD curve is consumer surplus (see the discussion in Chapter 5 ) . The area above the SS curve and below the price line is producer surplus and equals profits plus rent to the firms in the industry or owners of specialized inputs to the industry. The sum of the producer and consumer surpluses is economic surplus and measures the net contribution of that good to utility above the cost of production.
Can you find any reorganization of production that would increase the economic surplus in Figure 8-1 1 as compared to the competitive equilibrium at point E? If the answer is no, then the equilibrium is allocationally efficient (or Pareto efficient). Define allocational efficiency; then answer the question and explain your answer.