Question

Which of the following are necessary for markets to lead to a socially optimal level and distribution of output. CHOOSE ALL THAT APPLY.

a. Perfectly competitive markets

b. Market prices that incorporate externalities.

c. Technological progress.

d.No non-market output; all output is sold through markets.

e. No transactions costs.

f.No inheritance of wealth.

Answer 1

Social optimal QUANTITY is which MAXIMIZES total social surplus.

Because perfect competition leads to equilibrium where price equal to marginal cost, means last unit benefit to consumers is equal to last unit cost to seller,so last unit marginal social equal to zero, so at that point social surplus is MAXIMIZES.

If market price doesn't incorporate externalities then at private Equilibrium the P=MSC ,means last unit marginal benefit to consume is lower than last unit social cost ,which means last unit is generating negitive social surplus,which means social surplus is not maximizes,so to get social optimal QUANTITY,we need to incorporate externalities.

So correct option will be , perfect competition, price incorporate externalities,no non market output,No transaction cost( So that In case of no regulation , market itself reached to social optimal by negotiation).