Market efficiency

Maximising social surplus:

Social surplus is maximised at the equilibrium in a free market (no government intervention) as both consumer and producer surplus is maximised.

A consumer is national so will maximise their utility by comparing the price to the benefit they gain. They maximise at the equilibrium price.

Producers are also rational and will maximise satisfaction by comparing the price of the costs of production (supply curve). They maximise at the equilibrium price. The free market therefore maximises the social surplus. This is the point of allocative efficiency.

Allocative efficiency - where the right amount is bought and sold by society’s point of view.

Government intervention reduces allocative efficiency e.g. minimum price.

• The demand curve represents how much consumers are willing and able to pay for a product.

• They are willing and able to pay however much benefit they get from buying the product.

• Marginal private benefit is the benefit is the benefit recieved by consumers from consuming an additional unit of a product.

• Marginal private costs is the cost incurred by producers from producing an additional unit of a product.