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Allocative efficiency represents the most efficient allocation of scarce resources for an economy in the sense that, for any combination of scarce resources, the production of goods and services that occurs is most valued by society.  It results in a combination of goods and services being produced that maximises national welfare/living standards.  In other words, the most efficient allocation of resources occurs when it is impossible to increase production and living standards by changing the way resources are allocated.  The most efficient allocation of resources can also be described as an allocation that is pareto efficient in the sense that a move away from this position would result in society becoming worse off.  

If our resources are re-allocated such that production in the economy expands, does this mean that there will be an increase or improvement in allocative efficiency?  

Usually, an increase in production, ceteris paribus (other things being equal), will mean that allocative efficiency has improved. However, if the increase in production has occurred for goods or services that are not in the nation’s collective best interests (e.g. harmful products like illicit drugs), then allocative efficiency has fallen in the economy even though the volume of production has increased.  This is why it is important to examine the effect on national living standards or welfare (or value to society) when determining whether an economy has achieved the most efficient use of its resources. A narrow focus on the volume or real value of production from one period to the next can be misleading.

The PPC below is used to illustrate the concept of allocative efficiency, where for simplicity we assume that an economy can choose between the production of harmful goods (like high powered weapons or illicit drugs) and beneficial products (like health care and education). Despite all points of production being technically efficient, there is only one combination that is in the national best interest.  This is the point where the PPC intersects with the horizontal axis – no resources are allocated to the production of harmful products and all resources are allocated to the production of beneficial products.  Accordingly, if the economy produced at any other point on the PPC (i.e. it allocated some resources to the production of things like illicit drugs) then the nation’s welfare or living standards would decline. This is despite every other point the PPC being technically efficient.