What is economic efficiency? A. Economic efficiency is where deadweight loss is

Question

What is economic efficiency?

A.

Economic efficiency is where deadweight loss is maximized.

B.

Economic efficiency is where consumer surplus is maximized.

C.

Economic efficiency is where producer surplus is maximized.

D.

Economic efficiency is where consumer surplus and producer surplus are maximized.

E.

Economic efficiency is where government revenue is maximized.

Externalities affect the economic efficiency of a market equilibrium by causing a difference between

A.

the private cost of production and the social cost of production.

B.

the private benefit of consumption and the social benefit of production.

C.

consumer surplus and producer surplus.

D.

both a and b.

E.

all of the above.

Explanation / Answer

Economic efficiency is the state where the sum of producer and consumer surplus is maximised. There is no other point of equilibrium where any one surplus can be increased without affecting the surplus of the other. Thus the correct option should be Economic efficiency is where consumer surplus and producer surplus are maximized.

Externalities affect the economic efficiency of a market equilibrium by causing a difference between the private cost of production and the social cost of production as well as the private benefit of consumption and the social benefit of production. This is the difference between the social cost and social benefits which may lead to market failure if there is no intervention. The correct option therefore is D. both a and b.

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