Final answer:
If suppliers and demanders account for all relevant benefits and costs, the competitive market achieves allocative efficiency, where goods are produced at the quantity where price equals marginal cost, maximizing social surplus which includes both consumer and producer surplus.
Step-by-step explanation:
If all relevant benefits and costs are accounted for by suppliers and demanders in a competitive market, this scenario describes a situation where allocative efficiency is achieved. In such markets, many sellers and buyers participate, offering identical products, with all parties being well-informed about the products. Furthermore, sellers can enter and exit the market freely.
When perfectly competitive firms maximize their profits by producing the quantity where the price (P) equals the marginal cost (MC), they assure that the benefits to consumers of what they are buying, as measured by the price they are willing to pay, is equal to the costs to society of producing the marginal units, as measured by the marginal costs the firm must pay. This balance ensures that the optimal amount of each good and service is produced and consumed, maximizing the social surplus, which includes both consumer and producer surplus.
Consider a market for tablet computers as an example. The equilibrium price might be $80 and the equilibrium quantity 28 million. Any point on the demand curve above this equilibrium point indicates some consumers would have been willing to pay more than the actual price, thus demonstrating consumer surplus.
Similarly, the supply curve below the equilibrium point indicates a producer surplus. The total area of consumer and producer surplus represents the social surplus, indicating that the market is efficient and gains from trade are maximized.