Evaluate the view that perfect competition is a more efficient market structure than monopoly.

Perfect competition is a market structure dominated by many firms. No individual firm is capable of affecting the market supply curve, so one firm cannot affect the market price; the firms are price takers in perfect competition. There is freedom of entry and exit, and is characterised by perfect information and homogenous products. In the real world perfect competition is very rare and the model is more theoretical than practical.

Perfect competition is both allocatively efficient, because price equals marginal cost, and productive efficient, because firms produce at the lowest point on the average cost curve. It is also x-efficient because competition between firms will act as an incentive to increase efficiency. However, there are disadvantages to perfect competition. There is no scope for economies of scale, because there are many small firms producing relatively small amounts. There is little to no consumer choice, as products are undifferentiated. Lack of supernormal profit makes investment in research and development unlikely. There is also no incentive to develop new technology because this would be shared with other companies, as there is perfect knowledge.

A pure monopoly is defined as a single seller of a product. Being the only firm in the market, monopolies are therefore capable of affecting the market supply curve and can affect the market price; the firm is a price maker. There is a single seller, which sells products for which there are no close substitutes, and there are significant barriers for entry and exit - barriers that are so high that no other producer can enter the industry. An example of such a barrier would be sole ownership of a key resource would prevent competition. Consumers do not have perfect knowledge of the market. The demand faced by the industry, is the entire industry/market demand.

In contrast with firms in perfect competition, a monopoly is allocatively inefficient because in monopoly the price is greater than the marginal cost, thus resulting in dead-weight welfare loss for consumers. It is also productively inefficient because output does not occur at the lowers point on the average cost curve. There is x-inefficiency, because it is argued that a monopoly will have less incentive to cut costs, as there is no competition. However, it could be argued that a domestic monopoly can face competition from abroad, and thus still face competitive pressures.

However, a monopolist does, in contrast with firms in perfect competition, make supernormal profit. This is both an advantage and a disadvantage; although the firm can invest in research and development because of it, it could also result in unequal distribution of income in the economy. A monopoly can benefit from significant economies of scale, which can lead to lower prices for consumers. There is also more consumer choice, which is a huge benefit.

In conclusion, there are advantages and disadvantages to both market structures. However, in the long run I disagree with the view that perfect competition is a more efficient market structure than monopoly.

Answered by Karen Viktoria A. Economics tutor

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