Efficiency is achieved in competitive markets because ________.
A) producer surplus is maximized
B) consumer surplus is maximized
C) social surplus is maximized (the economic pie is made as large as possible)
D) deadweight loss is maximized

Question

Quizplus · Accepted Answer

In competitive markets, producers and consumers interact freely to buy and sell goods and services at the prevailing market price. This results in resources being allocated efficiently (i.e. social surplus is maximized), as the market price reflects the cost of production and the value consumers place on the good or service, leading to the economic pie being made as large as possible. Maximized producer or consumer surplus may occur in some cases, but these are not necessarily indicators of overall market efficiency. Deadweight loss, on the other hand, represents the inefficiencies caused by market distortions such as taxes or regulations and is not maximized in competitive markets.

Efficiency Is Achieved in Competitive Markets Because ________