Final answer:
A transfer pricing arrangement that uses the price that would be charged to an external customer is known as a market-based transfer price, aligning with competitive market principles.
Step-by-step explanation:
A transfer pricing arrangement that uses the price that would be charged to an external customer is a market-based transfer price. This type of pricing strategy ensures that the transfer price is reflective of the going market rate, which aligns with the principles of competitive markets. Market-based transfer prices are generally preferred when external markets for the intermediate goods are highly competitive and such prices can effectively mimic the equilibrium prices that would emerge in an open market.
Referring to the supplied information, in a perfectly competitive market, prices are determined based on supply and demand, leading to an efficient allocation of resources in such a way that the price equals the marginal cost of production. This scenario reflects the ideal condition where market prices serve the role of efficiently allocating resources without the need for bureaucratic intervention.