Which of the following is valid for a "first-best" world?
A)Social Marginal Benefit (SMB) Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Cost (SMC)
B)Social Marginal Cost (SMC) Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Benefit (SMB)
C)Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Cost (SMC) = Social Marginal Benefit (SMB)
D)Social Marginal Benefit (SMB) Social Marginal Cost (SMC)

Question

Which of the following is valid for a "first-best" world?
A)Social Marginal Benefit (SMB) > Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Cost (SMC)
B)Social Marginal Cost (SMC) > Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Benefit (SMB)
C)Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Cost (SMC) = Social Marginal Benefit (SMB)
D)Social Marginal Benefit (SMB) > Social Marginal Cost (SMC)

Quizplus · Accepted Answer

In a "first-best" world, the ideal situation would be where the market equilibrium (i.e. price, buyer's private marginal benefit, seller's private marginal cost) matches the social optimal outcomes (i.e. social marginal cost, social marginal benefit). This ensures that the resources are being allocated efficiently, and the welfare of society is maximized. Therefore, option C where all the factors are equal to each other is the valid choice for a "first-best" world.

Which of the Following Is Valid for a "First-Best" World