Gains from trade are maximized when:
A) the market price is higher than the equilibrium price.
B) the market price is less than the equilibrium price.
C) the market price is equal to the equilibrium price.
D) there are additional potential trades available that have not been completed.

Question

Quizplus · Accepted Answer

Gains from trade occur when both parties engage in a transaction voluntarily because they perceive that they will be better off as a result. This is most likely to occur when the market price is equal to the equilibrium price, which represents the point of intersection between the demand and supply curves. At this price, the quantity demanded and the quantity supplied are equal, and there is no excess demand or excess supply in the market. If the price were higher or lower than the equilibrium price, either the buyers or the sellers would have an incentive to change their behavior to achieve a better outcome, which could reduce gains from trade. Additionally, while there may be additional potential trades available, these would only contribute to gains from trade if they were completed, so they are not a sufficient condition for maximizing gains.

Gains from Trade Are Maximized When