The competitive quantity maximizes total surplus under key assumptions

Include units whose marginal benefit is at least marginal cost.

When demand equals marginal social benefit and supply equals marginal social cost, every unit before equilibrium has benefit greater than cost. Every unit beyond equilibrium costs more than buyers value it. The equilibrium quantity therefore maximizes consumer plus producer surplus.

The phrase “under key assumptions” is essential. In a competitive market, no buyer or seller controls price. If demand captures all marginal social benefits and supply captures all marginal social costs, the intersection MB=MC identifies the quantity where net gains stop increasing. Units to the left create positive surplus. Units to the right would create negative surplus.

This is allocative efficiency. Productive efficiency means output is produced at the lowest feasible cost. Competitive long-run equilibrium in the standard model can achieve both, but the terms are not synonyms. A firm can produce a chosen quantity at minimum cost while the market still produces the wrong total quantity because of monopoly or an externality.

This efficiency result depends on competition and the absence of externalities or other failures. A pollution externality makes market supply understate social cost. A monopoly restricts quantity below the competitive level. The graph may look familiar, but the relevant curves differ.

A positive externality makes market demand understate marginal social benefit, so the private equilibrium quantity is too low. A negative production externality makes private supply understate marginal social cost, so the private equilibrium quantity is too high. The efficiency rule remains MSB=MSC. The error lies in using incomplete private curves.

The last efficient unit

The fourth unit has willingness to pay $18 and seller cost $15, so it creates $3 of surplus. The fifth has willingness to pay $14 and cost $17, destroying $3 if produced. The efficient quantity is four units.

For indivisible units, inspect the surplus contribution of each successive trade and stop after the final nonnegative contribution. Do not average the fourth and fifth rows or insist on an exact equality. The efficient boundary can fall between them. Adding the fifth would reduce total surplus even though its benefit is positive.

The efficient quantity is three and total surplus is $33. Producing four units would lower total surplus to $26. Total benefit would still rise by $13, but total cost would rise by $20. Efficiency follows the marginal difference.

Market equilibrium also determines who trades. In a well-functioning competitive market, units go to buyers with the highest willingness to pay and are produced by sellers with the lowest costs. A price control can reduce quantity or misallocate units even when a legal price looks favorable to one side.

Use social curves when the question asks for efficiency

Private equilibrium is efficient only when private marginal benefit and cost include all relevant social effects. If a spillover is stated, locate MSB and MSC before choosing the quantity.

Efficiency therefore depends on what the curves measure, not merely on whether two curves intersect.