Using the concepts of WTP, WTA, Consumer Surplus, and Producer Surplus explain how free markets maximize...

Using the concepts of WTP, WTA, Consumer Surplus, and Producer Surplus explain how free markets maximize social welfare.

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Free markets work on the idea of market equilibrium. Consumers and producers interact and equilibrium market prices are set where market demand equals market supply. Consumer's demand curve is the locus of consumer's maximum willingness to pay (WTP) for the given quantity of good or service while producer's supply curve is the locus of producer's Maximum willingness to accept (WTA) for given quantity of good or service. At equilibrium, all consumer's with higher WTP than the equilinrium price enjoy a surplus because they are paying less than their willingness. Sum of this surplus is known as consumer suplus. Similarly at equilibrium, all producers who are getting equilibrium price higher than their WTA wnjoy a surplus because they are getting higher than what they are willing to accept. Sum of these surplus is known as producer's surplus. In free market both consumer surplus and producer surplus is maximized and hence the total welfare (social weldare) which is the sum of consumer's and producer's surplus is maximized in free market.

Rahul Sunny answered 1 month ago

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