Question

Which economic concept best describes the situation where market equilibrium (E1) results in a price of $5 and a quantity of 400,000, while the socially optimal equilibrium leads to a price of $6 and a quantity of 500,000?

A) Market Efficiency
B) Public Goods
C) Externalities
D) Monopoly Power

Answer 1

The economic concept that best describes the situation is Market Efficiency. Market efficiency occurs when resources are allocated optimally in a market. It is important to consider the difference between market equilibrium and socially optimal equilibrium.The correct option is A.

Step-by-step explanation:

The economic concept that best describes the situation where the market equilibrium (E1) results in a price of $5 and a quantity of 400,000, while the socially optimal equilibrium leads to a price of $6 and a quantity of 500,000 is Market Efficiency.

Market efficiency refers to the degree to which resources are allocated optimally in a market. In this case, the market equilibrium at E1 is efficient because it represents the point where the supply and demand curves intersect, maximizing the benefits to both consumers and producers.

However, the socially optimal equilibrium, where price is $6 and quantity is 500,000, represents a more desirable outcome from a societal perspective, as it would lead to greater overall welfare. This difference between market equilibrium and socially optimal equilibrium highlights the concept of market failure, where the market does not produce the optimal outcome.