POL-2.A—a. Define social efficiency. b. Explain (using graphs where appropriate) why resource allocation in perfectly competitive markets…

a. Define social efficiency. b. Explain (using graphs where appropriate) why resource allocation in perfectly competitive markets is socially efficient.

• The optimal quantity of a good occurs where the marginal benefit of consuming the last unit equals the marginal cost of producing that last unit, thus maximizing total economic surplus.
• The market equilibrium quantity is equal to the socially optimal quantity only when all social benefits and costs are internalized by individuals in the market. Total economic surplus is maximized at that quantity. [See also PRD-3 and POL-3.]
• Enduring understanding POL-2: Perfectly competitive markets allocate resources efficiently, but imperfect competition often results in market inefficiencies.