In the absence of externalities, which market structure produces the socially optimal quantity?

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When considering the social efficiency of markets without externalities, we compare how each structure allocates resources to where marginal social benefit equals marginal social cost.
Option 1: Perfect competition. In a perfectly competitive market with no externalities, many buyers and sellers, price equals marginal cost, and output is driven to the point where P = MC. This alignment yields the socially optimal quantity because it maximizes total surplus.
Option 2: Monopolistic competition. Although there are many firms, product differentiation gives each firm some market power. They set prices above marginal cost, leading to a quantity produced that is below the social optimum and a deadweight loss.
Option 3: An oligopoly. With a few large firms, strategic interactions can enable price setting above marginal cost or restrictive output. This usually results in underproduction or pricing that reduces total welfare compared to perfect competition, moving away from the social optimum.
Option 4: A monopoly. A single seller faces the market and can restrict output to raise price. The result is a quantity well below the socially optimal level, generating a clear deadweight loss and inefficiency.
Option 5: A monopsony. A single buyer can depress input prices and reduce the quantity purchased, which also tends to underproduce relative to the social optimum and lowers total welfare when externalities are absent.
In summary, among these structures, the perfectly competitive market best achieves the socially optimal quantity under the stated conditions because it minimizes pricing power and aligns price with marginal cost.

AP Economics-Hillebrand Quiz Micro 6.1-6.3- Requires Respondus LockDown Browser

In the absence of externalities, which market structure produces the socially optimal quantity?

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