Question

With the aid of graph(s), explain why a benevolent social planner will choose to equate

quantity demanded to quantity supplied.

Answer 1

Ans. A benevolent social planner will choose to equate quantity demanded equals quantity supplied beacuse if both the quantities are defferent then there will be an inefficient allocation represented by a deadweight loss in the market.
1. If the quantity demanded exceeds quantity supplied then there will be shortage in the market, so, buyers who are willing to buy the good at the market clearing price may not be able to buy the good or have to wait in long queues to buy the good causing efficiency loss creating a deadweight loss represented by the shaded area.

2. If the quantity supplied exceeds the quantity demanded then there will be a surplus of the good in the market due to which the producer may not be able sell the good even if he is willing to sell the good at the market price or have to sell it illegaly below th current price prevailing in the market causing efficiency losses creating a deadweight loss represented by a shaded region .

3. But if the quantity demanded equals the quantity demanded, every buyer who values the good at market clearing price (P) will be able to buy the good and every seller willing to sell the good at market clearing price, will be able to sell the good making this socially efficient output of Q where there are no deadweight losses.

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