In a competitive market with no externalities, what equality characterizes the market equilibrium?

• A. Price equals marginal cost of production
• B. Marginal social benefit equals marginal social cost
• C. Price equals average total cost
• D. Marginal benefit equals the average cost

Answer: (B)

The key idea is that in a perfectly competitive market without external effects, the efficient allocation occurs where the value of one more unit to society equals the cost of producing that unit. This is expressed as marginal social benefit equals marginal social cost. Since there are no externalities, private marginal benefits and costs align with social ones, so MB = MC and MSB = MSC are the same condition. This equality identifies the quantity where the extra benefit to buyers just covers the extra cost to society of producing it. The other statements describe related price signals or cost concepts, but MSB = MSC directly captures the social welfare balance at equilibrium.