Question

Question 7 1 pts Consider a perfectly competitive market. Why is the market equilibrium pareto efficient? in this market, one can make someone better off without harming someone else. consumer surplus is maximized but producer surplus is not maximized Oproducer surplus is maximized but consumer surplus is not maximized total surplus is maximized. all of the above

Answer 1

Answer option –(4)   Total Surplus is Maximised

Explanation:-   in perfect competition the market equilibrium level of output is pareto efficient. Because the equilibrium output produced in perfect competition is achieving productive efficiency and allocative efficiency.

Productive efficiency refers to that when a firm could able to produce maximum output at a minimum cost, in perfect competition firms achieves productive efficiency by setting the price = minimum of AC, this can occur only in longrun.

Industry Firm Supply Demand and Supply MC AC Cost and Consumer E Revenue Surplus Price AR P MR Producer Surplus Demand Q Output Output

Allocative efficiency refers to that when the producer surplus and consumer surplus is maximum, as a result the total surplus is also at maximum. In perfect competition the firm achieves allocative efficiency by setting the price = Marginal cost (MC). In the above diagram the firm achieves allocative efficiency at OQ level of output because at this level of output the price = MC.

Moreover, at achieved allocative efficiency level of output in market, the consumer surplus which is above the price and below the demand curve is maximum and producers surplus i.e. below the price and above the supply curve is maximum. As a result the total surplus = consumer surplus + producer surplus is maximised. Any price, other than the equilibrium level of price (P) where the market demand curve equals with market supply curve, will not give maximum total surplus