Question

Q5) With the aid of graphs, explain why a benevolent social planner Will choose to equate quantity demanded to quantity supplied

Answer 1

Price Supply Р Demand Qd Q Qs Quantity Surplus

Price Supply P Demand Qs Q Qd Quantity Shortage
Ans. A benevolent social planner will choose to equate quantity demanded and quantity supplied because if quantity demanded or quantity supplied are defferent then there will be an efficiency loss in in the form of a deadweight loss in the economy. If the quantity demanded exceeds quantity supplied then there will be shortage in the market, so, buyers who are willing to buy the good at the market clearing price may not be able to buy the good creating a deadweight loss (= green shaded region) and if the quantity supplied exceeds the quantity demanded then there will be a surplus of the good in the market due to which the producer may not be able sell the good even if he is willing to sell the good at the market price creating a deadweight loss (= blue shaded portion). But if the quantity demanded equals the quantity demanded, every buyer who values the good at market clearing price will be able to buy the good and every seller willing to sell the good at market clearing price, will be able to sell the good making this outcome socially efficient.

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