Final answer:
In a competitive market, maximizing economic surplus means that the combined consumer and producer surplus is at its peak, reflecting an efficient allocation of resources at the market equilibrium.
Step-by-step explanation:
When a competitive market maximizes economic surplus, it means that the sum of consumer surplus and producer surplus is at its highest possible level. This occurs at the point where the market reaches equilibrium, where the quantity demanded by consumers matches the quantity supplied by producers, and the price paid by buyers is equal to the marginal cost of production. This state of efficiency ensures that resources are allocated in a way where the marginal benefit to consumers (represented by what they are willing to pay) is equivalent to the marginal cost of production, achieving allocative efficiency.
In the context of the student's question, the correct answer is option C: Combined consumer and producer surplus is maximized. This is because at the market equilibrium, no additional trades could make someone better off without making someone else worse off. Therefore, the market efficiently allocates resources, maximizing overall welfare.