Figure 1: Perfectly Competitive Firm Figure 2: Monopoly
at long-run equilibrium: at long-run equilibrium:
Pe = min ATC (Productive Efficiency) Pe = min ATC (Productive Efficiency)
Pe = MC (Allocative Efficiency) Pe = MC (Allocative Efficiency)
Figure 1 shows the long-run equilibrium of a perfectly competitive firm. The diagram clearly shows that a perfectly competitive firm achieves economic efficiency (productive and allocative efficiency) in the long run. At the profit- maximizing level of output Qpe, price (Pe) is equal to marginal cost (MC), and therefore society’s scarce resources are being allocated efficiently. At the same point (Qpe), price (Pe) is equal to average total cost (ATC), and therefore the lowest possible costs are being achieved; hence there is no waste of resources. 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. At the same point (Qm), price (Pe) is higher than minimum average total cost (min ATC), which means Pe ≠ min ACT, therefore production is not efficient. In other words, economic efficiency is not achieved in a monopolist firm because in its long-run equilibrium, Pe > MC and Pe > min ATC.
Supported by Figure 1 and Figure 2 above, I agree that a perfect competitive firm is more likely to achieve economic efficiency as compared to a monopolist firm. In perfect competition, firms produce the particular combination of goods and services that consumers mostly prefer. This is shown on Figure 2 that Pe = MC, which indicates allocative efficiency. A perfectly competitive firm produces at the lowest possible cost. This is shown on Figure 2 that P = min ATC, which indicates productive efficiency. 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.
