Question

Explain why a perfectly competitive market maximizes social welfare.

Answer 1

Ans. When the perfectly competitive firms try to maximize their profits by producing that level of quantity where P = MC, they are ensuring that the benefits of consumers of what they are buying which is measured by the price they are willing to pay is equal to the cost to society of producing marginal units, which is measured by the marginal cost that the firm has to pay. Thus, in perfect competitive market there is maximization of total surplus which is the sum of consumer surplus and producer surplus and there is no deadweight loss in the market.