When social surplus is maximized in competitive equilibrium

Question

Quizplus · Accepted Answer

In a competitive equilibrium, the market achieves both allocative and productive efficiency as resources are allocated in the most efficient way possible and output is produced at the lowest possible cost. This is achieved because the market price in a competitive equilibrium reflects the marginal social benefit (MSB) and the marginal social cost (MSC), and these are equal when social surplus is maximized. As a result, both consumer surplus (CS) and producer surplus (PS) are maximized, because everyone is willing to pay exactly the price that reflects the MSC, and everyone is willing to sell at a price that reflects the MSB, which means that there is no deadweight loss in the market. Therefore, options A, B, and C are all correct, and the best choice is D, which combines them.

When Social Surplus Is Maximized in Competitive Equilibrium