Which one of the following statements is correct concerning market efficiency in the context of market equilibrium?

• A. Market efficiency is achieved only when government intervention sets the equilibrium price.
• B. Market equilibrium always results in equal quantities demanded and supplied at every price.
• C. Market efficiency requires that all buyers and sellers have identical preferences.
• D. At market equilibrium, total surplus (the sum of consumer and producer surplus) is maximized.

Answer: (D)

Verified step by step guidance

1. Understand the concept of market efficiency: Market efficiency in microeconomics refers to a situation where resources are allocated in a way that maximizes total surplus, which is the sum of consumer surplus and producer surplus.
2. Recall the definition of market equilibrium: Market equilibrium occurs at the price where the quantity demanded equals the quantity supplied, meaning there is no excess demand or supply.
3. Analyze the relationship between market equilibrium and total surplus: At equilibrium, the allocation of goods maximizes total surplus because any deviation from this price would lead to either a surplus or shortage, reducing total welfare.
4. Evaluate the incorrect statements: Government intervention setting prices can sometimes cause inefficiency; equal quantities demanded and supplied occur only at equilibrium price, not at every price; and buyers and sellers do not need identical preferences for market efficiency.
5. Conclude that the correct statement is: At market equilibrium, total surplus (the sum of consumer and producer surplus) is maximized, reflecting an efficient allocation of resources.