Which of the following policies would most likely further the economic goal of efficiency?

• A. Redistributing income through progressive taxation
• B. Setting price ceilings below equilibrium to make goods more affordable
• C. Allowing markets to allocate resources based on consumer preferences and producer costs
• D. Imposing quotas to limit production in certain industries

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the economic goal of efficiency, which means allocating resources in a way that maximizes total surplus (the sum of consumer and producer surplus) without waste.
2. Step 2: Analyze how redistributing income through progressive taxation affects efficiency. While it may promote equity, it can create distortions in incentives and reduce efficiency by altering market behavior.
3. Step 3: Consider the impact of setting price ceilings below equilibrium. This often leads to shortages and misallocation of resources, reducing efficiency because the quantity demanded exceeds quantity supplied.
4. Step 4: Evaluate the effect of imposing quotas to limit production. Quotas restrict output below the market equilibrium level, causing deadweight loss and inefficiency by preventing mutually beneficial trades.
5. Step 5: Recognize that allowing markets to allocate resources based on consumer preferences and producer costs leads to an efficient outcome, as prices reflect scarcity and preferences, guiding resources to their most valued uses.