Which type of market structure is most likely to achieve both allocative and productive efficiency, maximizing total welfare?

• A. Oligopoly
• B. Monopolistic competition
• C. Monopoly
• D. Perfect competition

Answer: (D)

Verified step by step guidance

1. Understand the definitions of allocative and productive efficiency: Allocative efficiency occurs when resources are distributed such that consumer preferences are met (price equals marginal cost, \(P = MC\)), and productive efficiency occurs when goods are produced at the lowest possible average cost (production at minimum average total cost, \(ATC\)).
2. Review the characteristics of each market structure: Perfect competition has many firms, identical products, free entry and exit, and firms are price takers; monopoly has a single firm with market power; oligopoly has few firms with interdependent pricing; monopolistic competition has many firms with differentiated products.
3. Analyze how each market structure performs in terms of efficiency: Perfect competition leads to \(P = MC\) and production at minimum \(ATC\), achieving both allocative and productive efficiency; monopolies produce less and charge higher prices, causing allocative inefficiency; oligopolies and monopolistic competition have some market power, leading to prices above marginal cost and excess capacity.
4. Conclude that perfect competition is the market structure most likely to maximize total welfare by achieving both allocative and productive efficiency due to its characteristics and competitive pressures.
5. Summarize that the key to maximizing total welfare lies in the price equaling marginal cost and production at minimum average total cost, conditions best met under perfect competition.