Which two conditions must be satisfied for a competitive market to produce efficient outcomes?

• A. Consumers and producers have incomplete information about prices and products.
• B. Government sets prices and quantities for all goods and services.
• C. Firms have market power and can set prices above marginal cost.
• D. Resources are allocated such that marginal benefit equals marginal cost, and there are no externalities.

Answer: (D)

Verified step by step guidance

1. Understand that an efficient outcome in a competitive market means resources are allocated in a way that maximizes total surplus, which is the sum of consumer and producer surplus.
2. Recall the first condition for efficiency: the marginal benefit to consumers from consuming a good must equal the marginal cost of producing that good. This ensures that the quantity produced is socially optimal.
3. Recognize the second condition: there should be no externalities, meaning that all costs and benefits of production and consumption are reflected in market prices, so private decisions align with social welfare.
4. Note that incomplete information, government price controls, or firms having market power violate these conditions and lead to inefficiencies.
5. Summarize that the two key conditions for efficiency in a competitive market are: (1) marginal benefit equals marginal cost, and (2) absence of externalities.