In the absence of externalities, the perfectly competitive market maximizes economic surplus when

Question

BlackTom AI · Accepted Answer

To evaluate the options, we start from the core idea of a perfectly competitive market with no externalities: economic surplus (total benefits minus total costs) is maximized when resources are allocated where marginal benefit equals marginal cost (MB = MC).
Option 1: 'the market price is above the equilibrium price.' When price is above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. This misallocates resources and reduces overall surplus, so this is not the condition for maximizing surplus.
Option 2: 'the market price is below the equilibrium price.' A price below equilibrium causes a shortage: quantity demanded exceeds quantity supplied. This imbalance leads to underallocation and reduces total surplus, making this option false.
Option 3: 'the market is at equilibrium.' At equilibrium, MB equals MC across the units traded, and no unexploited gains from trade remain. This condition aligns with the standard result that, absent externalities, competitive markets maximize economic surplus. It is the correct characterization of the efficient outcome in this setup.
Option 4: 'for the last unit produced, marginal benefit exceeds marginal cost.' If MB > MC for the last unit, production would continue to increase until MB = MC; at the actual efficient point, MB = MC for the marginal unit. Therefore stating that MB exceeds MC for the last unit implies underestimation of the optimal output and is not the condition for maximum surplus.
Option 5: 'the total benefit from all units produced equals the total costs of all units produced.' While total surplus is maximized when MB = MC for each unit, the condition that total benefits exactly equal total costs does not correctly describe the distribution of surplus across units. In fact, at efficient output, total benefits exceed total costs by the maximum possible amount, not merely equalize them. Hence this statement is inaccurate.

In the absence of externalities, the perfectly competitive market maximizes economic surplus whenSingle choice

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