6.1 Socially Efficient and Inefficient Market Outcomes
A market is socially efficient at the quantity where MSB = MSC: total surplus (consumer plus producer) is maximized and there is no deadweight loss.
Consumer surplus is the value buyers get above what they pay; producer surplus is what sellers receive above their cost. Their sum, total surplus, is maximized at the quantity where marginal social benefit equals marginal social cost — which is the competitive equilibrium when there are no externalities.
Efficiency has two parts. Allocative efficiency means producing the quantity society values most, where P (marginal benefit) = MC. Productive efficiency means producing at the lowest possible cost, at minimum ATC. Perfect competition delivers both in the long run.
Producing too little leaves mutually beneficial trades unmade; producing too much means the extra units cost society more than they are worth. Either way the lost surplus is deadweight loss. Market power, externalities, public goods, and government price controls are the standard reasons markets land away from MSB = MSC.
Key terms for 6.1
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Practice the math
Assuming market equilibrium is always efficient. It maximizes total surplus only when private and social costs and benefits coincide — with an externality or market power, the market quantity is the wrong one.
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