The production possibilities curve provides information on technical efficiency – that is, the maximum number of goods and services that can be produced with the given resources. It does not tell us which of these possible combinations present allocative efficiency – that is, the optimal (best) combination of goods and services desired by consumers.
Allocative efficiency is achieved when the economy is doing the best possible job of satisfying unlimited wants and needs with limited resources. To achieve this however, the market must first achieve technical efficiency. And this technical efficiency must be useful or valued by people.
For example, an industry might achieve technical efficiency for the production of 10cm pieces of yellow cotton string, but if nobody in the market actually wants these, they will pile up in a room somewhere, and allocative efficiency has not been achieved.
Allocative efficiency occurs when an economy provides the greatest amount of consumer satisfaction that is possible given the available resources. So markets have a role to play in determining not only the point of technical efficiency for the production of a good or service, but also the point of allocative efficiency.
The production possibilities curve provides information on technical efficiency – that is, the maximum number of goods and services that can be produced with the given resources. It does not tell us which of these possible combinations present allocative efficiency – that is, the optimal (best) combination of goods and services desired by consumers.