The efficient quantity prevails in a market when the market:
A. costs exceed benefit by the largest margin.
B. has the lowest average cost.
C. yields the largest possible economic surplus.
D. has benefit equal to cost.
The Correct Answer and Explanation is:
Correct Answer: C. Yields the largest possible economic surplus.
Explanation:
The efficient quantity in a market occurs when resources are allocated in a way that maximizes total economic surplus—the sum of consumer surplus and producer surplus. This condition ensures that society is gaining the greatest net benefit from the production and consumption of a good or service.
Understanding Economic Surplus:
- Consumer Surplus is the difference between what consumers are willing to pay for a good and what they actually pay.
- Producer Surplus is the difference between what producers are paid and their cost of production.
When a market is operating at the efficient quantity, every unit of the good that provides a benefit to consumers greater than or equal to its production cost is produced and consumed. No units are under-produced or over-produced. At this point:
- There are no missed opportunities for mutually beneficial trades.
- The value to buyers (benefit) exceeds or equals the cost to sellers, ensuring both parties gain.
- This balance leads to the highest total gains from trade, which is known as economic surplus.
Why the Other Choices Are Incorrect:
- A. Costs exceed benefit by the largest margin: This describes inefficiency, not efficiency. If costs are greater than benefits, resources are being wasted.
- B. Has the lowest average cost: Minimizing average cost is important for firm efficiency but doesn’t guarantee market efficiency in terms of overall welfare.
- D. Has benefit equal to cost: While this may describe the marginal decision rule (i.e., produce until marginal benefit equals marginal cost), it does not directly capture the broader idea of maximizing total economic surplus, which is what market efficiency is all about.
Conclusion:
The efficient quantity is reached not merely when marginal benefits equal marginal costs, but when the total economic surplus is maximized, making Option C the best and most complete answer.