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Evaluate the view that greater economic efficiency (allocative and productive efficiency) will always be achieved in perfect competition compared to monopoly.

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Introduction

Evaluate the view that greater economic efficiency (allocative and productive efficiency) will always be achieved in perfect competition compared to monopoly. Perfect competition is when there are many firms in the market which have no control over price (price-takers). All firms sell a standardized product and there are no barriers to entry and exit. On the other hand, a monopoly is a single large firm in the market that has significant control over price (price-maker). The firm sells a unique product with no substitutes and there are high barriers to enter into the industry. Allocative efficiency is given by the condition when price (P) = marginal cost (MC), and productive efficiency is given by the condition when price (P) = minimum average total cost (min ATC). ...read more.

Middle

In other words, economic efficiency is achieved in a perfectly competitive firm because in its long-run equilibrium, Pe = MC = minimum ATC. Figure 2 shows the long-run equilibrium of a monopolist firm. The diagram clearly shows that a monopolist firm does not achieve economic efficiency (productive and allocative efficiency) in the long run. At the profit- maximizing level of output Qm, price (Pe) is higher than marginal cost (MC), which means Pe = MC, therefore there is a misallocation of resources. The fact that P > MC means that some consumers place a greater value on the production of the good than it costs the monopolist to produce it. ...read more.

Conclusion

In monopoly, there is an under-allocation of resources to the good; in other words, goods and services produced do not represent what consumers most prefer. This is shown on Figure 1 that Pe > MC, which indicates allocative inefficiency. The monopolist produces at a higher price than the lowest possible cost. This is shown on Figure 1 that P > min ATC, which indicates productive inefficiency. As discussed throughout the article, although to a certain extent perfect competition is an abstract and unrealistic market structure, I would say that the view that greater economic efficiency will always be achieved in perfect competition compared to monopoly is true, due to the fact that in a perfectly competitive firm, P = MC = min ATC, and in a monopolist firm, P > min ATC > MC. ?? ?? ?? ?? Michel Mak 12E ...read more.

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