Which of the following is an economic challenge that governments must face when trying to maximize economic surplus and efficiency?

• A. Eliminating all forms of consumer surplus
• B. Addressing market failures such as externalities and public goods
• C. Preventing any form of government intervention in the market
• D. Ensuring that all firms operate as monopolies

Answer: (B)

Verified step by step guidance

1. Understand the concept of economic surplus, which is the sum of consumer surplus and producer surplus, representing the total benefit to society from the production and consumption of goods and services.
2. Recognize that maximizing economic surplus and efficiency means achieving an allocation of resources where no one can be made better off without making someone else worse off (Pareto efficiency).
3. Identify common economic challenges that prevent markets from achieving maximum efficiency, such as market failures. Market failures include externalities (costs or benefits not reflected in market prices) and public goods (goods that are non-excludable and non-rivalrous).
4. Evaluate the options given: eliminating consumer surplus is not desirable since consumer surplus contributes to economic welfare; preventing government intervention ignores the role of government in correcting market failures; ensuring all firms operate as monopolies reduces competition and efficiency.
5. Conclude that the key economic challenge for governments is addressing market failures like externalities and public goods to improve economic surplus and efficiency.