Is the allocation of resources determined by free markets the best outcome as far as economic well being is concerned? YES!
Consumer and Producer Surplus in the Market Equilibrium:* In the graph below, the demand curve reflects the value to the buyers(willingness to buy) and the supply curve reflects the cost to sellers.-The total area between the supply and demand curves up to the point ofequilibrium represents the total surplus in this market.-If the value to the marginal buyer EXCEEDS the cost to the marginal seller(eg. Q200above), then increasing the quantity will raise the total surplus.-If the value to the marginal buyer is LESS than the cost to the marginalseller (eg. Q700above), then decreasing the quantity will raise the totalsurplus.Three Insights About Free Markets:1.Allocate the supply of goods to the buyers who value them most highly(measured by their willingness to pay).2.Allocate the demand for goods to the sellers who can produce them at theleast cost.3.Produce the quantity of goods that maximizes total surplus (CS +PS) –total surplus is maximized at equilibrium.* Read conclusion on pg. 213 & the Algebra section on pg. 217.Chapter 10: Externalities