Question

explain why a perfectly competitive market maximizes social welfare.

Answer 1

In a perfectly competitive market all firm produce at there full capacity. Full information about the market is available. No firm influence the price so there is an uniform price in the market and as there is no restriction to enter the market and exit it, all firms earn Normal profit which makes it clear that no consumer is being exploited. As both consumer and producer surplus is maximised, the social welfare is being maximised here.

If we will take into consideration the first fundamental theorem of welfare economics which says perfect competition is Pareto optimal is also true. Here no one can get better without compromising someone else's utility. So perfect competition maximises social welfare.