Final answer:
Social welfare, the sum of producer and consumer surplus, is maximized at market equilibrium, where the quantity demanded equals the quantity supplied.
Step-by-step explanation:
Social welfare, which is the sum of producer and consumer surplus, is maximized when the market reaches equilibrium. At this point, the optimal amount of goods and services is produced and consumed, meaning the economy is getting the maximum benefit from its scarce resources, and all possible gains from trade have been achieved.
Market equilibrium occurs when the quantity demanded equals the quantity supplied, leading to an efficient allocation of resources. Here, consumer surplus represents the difference between what consumers are willing to pay for a good and the market price, while producer surplus is the difference between the market price and the minimum price at which producers are willing to sell. Together, these form the social surplus, which is at its highest without any deadweight loss when the market is in equilibrium.