Answered: What can we say about the size and…

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter3: Supply And Demand: Theory

Section: Chapter Questions

Problem 5WNG

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What can we say about the size and distribution of total surplus in an efficient
market?

Expert Solution

Step 1

The efficient market or a market with efficiency refers to a market where the resources are optimized, the resources are not at all wasted, the people pay according to their willingness, and other activities in the market runs smoothly and properly without problems of adverse selection and moral hazard.

Step 2

The size of the total surplus:-

The total surplus is made up of the consumer and the producer surplus wholly. The consumer surplus is the price which the consumer pays and still is left behind with a lot of surplus which increase his satisfaction. The consumer surplus is the maximum in the case of an efficient market.
The producer surplus is a form of profit which the produce owns from the consumer for the sale of goods and other items. This is a form of profit which takes away the consumers’ income. Hence, in an efficient market, the producer surplus is minimum or nil.

The distribution of the total surplus:-

The distribution is done to the consumers and the produces and the other part is a loss. This happens in the case of the monopoly where there occurs social cost loss.
The distribution of the consumer surplus and the producer surplus is exact and nobody gets worse off in the case of efficient market.

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