Where total surplus is largest

Total economic surplus is consumer surplus plus producer surplus, the area between the demand curve and the supply curve over every unit that gets traded. That area keeps growing as long as each added unit is worth more to a buyer (the height of demand) than it costs a seller to make (the height of supply). On this graph demand is above supply for every unit up to Q2, and below it after. So the area is largest when exactly Q2 units are traded at the matching price P2, the point where the two curves cross. Total surplus there is A + B + C + D + E + F. Any other quantity either leaves valuable trades undone or adds trades that cost more than they are worth.

Each choice

• A. This pairs P3 with the amount sellers would offer at that price, read off the supply curve. But Q3 goes past the crossing point. Units beyond Q2 cost more to produce than buyers value them, so trading them shrinks total surplus.
• B. This is what a price floor at P3 would produce: only Q1 units trade. The trades between Q1 and Q2 are lost, so total surplus is smaller by the deadweight triangle.
• C (correct). The competitive equilibrium is where total surplus peaks, because every trade worth making happens and no other does.
• D. Like a price ceiling at P1, this cuts trade back to Q1. Some buyers would gladly pay more than it costs to supply them, and those gains disappear.
• E. Q3 is what buyers would want at the low price P1, read off the demand curve. Sellers would offer only Q1 at that price, and even if Q3 units changed hands, the ones past Q2 would cost more to make than buyers value them. A low price with a big quantity can look like a win for everyone, but it is not efficient.