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Social efficiency in a competitive market is achieved at the equilibrium price because at that point:
Aproducer surplus is maximised while buyers gain nothing
Bthe combined consumer and producer surplus is maximised
Cconsumer surplus is maximised while sellers gain nothing
Dboth surpluses fall to zero as the market clears fully
Answer & Solution
Correct answer: B. the combined consumer and producer surplus is maximised
1. Social efficiency is the net gain to society from all exchanges, made up of consumer surplus plus producer surplus.
2. At the equilibrium price the market clears and both sides trade as much as is mutually beneficial.
3. This is where the sum of the two surpluses is greatest.
4. So social efficiency means the combined surplus is maximised.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit III "Supply", p.12_
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