In which situation is a market allocatively efficient?
Select ONE answer:
- It is when consumer surplus equals producer surplus.
- It is when marginal social benefit equals marginal social cost.
- It is when there are both positive consumption externalities and positive production externalities.
- It is when the value of external benefits exceeds the value of external costs.
Show your workings to arrive at your answer, and explain and justify your reasons:……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
This multiple choice question is suitable for Economics KS5 classes.
The answer is 2
- Allocative efficiency would be achieved where consumer surplus plus producer surplus is maximised.
- Correct: Marginal social benefit equalling marginal social cost ensures that the value society places on the last unit produced equals the cost of that unit.
- The existence of externalities is likely to mean that market failure will occur.
- To ascertain whether allocative efficiency is being achieved, it is not sufficient just to compare external benefits and costs – social benefits and costs needed to be compared.
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