Perfect competition achieves allocative efficiency by ensuring that goods and services are distributed in alignment with consumer preferences.

In a perfectly competitive market, there are numerous buyers and sellers, with no single participant possessing the ability to influence the market price. Consequently, the price of a good or service is determined by the interaction of supply and demand. When the market reaches equilibrium, the price reflects the marginal cost of production, which is defined as the cost associated with producing one additional unit. This scenario establishes the condition of allocative efficiency.

Allocative efficiency occurs when resources are allocated in such a manner that no individual can be made better off without making someone else worse off. Essentially, this condition is met when the value that consumers assign to a good or service—manifested in the price they are willing to pay—equals the cost of the resources expended in its production. In a perfectly competitive market, firms are considered price takers, meaning they accept the market price as given. They will continue to produce until the price equals the marginal cost, represented mathematically as $P = MC$, which is the criterion for allocative efficiency.

Additionally, perfect competition allows for freedom of entry and exit in the market. If firms are earning supernormal profits, new entrants will be drawn to the market, which increases supply and consequently drives down the price until only normal profits remain. Conversely, if firms are incurring losses, some will exit the market, leading to a reduction in supply and an increase in price. This self-correcting mechanism ensures that resources are not wasted on the production of goods and services that do not meet consumer demand.

Moreover, perfect competition fosters innovation and continuous improvement. Firms face constant pressure to enhance their products and reduce costs in order to attract and retain customers. This competitive environment leads to dynamic efficiency, which represents a long-term form of allocative efficiency.

In summary, perfect competition results in allocative efficiency by ensuring that goods and services are produced and distributed according to consumer preferences. It accomplishes this through the mechanism of price equaling marginal cost, the freedom of entry and exit, and the impetus for innovation and improvement.