Question

What does it mean to say that markets are socially efficient? How does this relate to policy?

Answer 1

The market is socially efficient when the marginal social benefit is equal to the marginal social cost or if it maximizes the total surplus which is the consumer surplus plus the producer surplus because if total surplus will be high that means dead weight loss will be less. To attain the social efficiency in the market government changes its policies related to taxes, subsidies, various regulations and expenditures to decrease the negative externalities and increase positive externatities in the market. the externalities affects the the social efficiency in the market by increasing cost and reducing benefits for the consumers which affects the social welfare and makes the market socially inefficient.