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What is the best market structure?

In Economics, we tend to think of "best" as synonymous with "most efficient." There are many different types of efficiency, but the most important of them are allocative and productive efficiency, since they indicate the degree to which goods and services are produced and sold at the lowest possible price. Intuitively, perfectly competitive markets seem the best equipped to manage this, since, in the long run, the absence of firms with market power and the availability of perfect information mean that price equals marginal cost (the condition for allocative efficiency) and production is capped at the point where average total cost is at its lowest (the condition for productive efficiency). However, the assumptions of perfect competition, such as perfect information and complete absence of barriers to entry, are unrealistic. Furthermore, whilst monopolistic markets are neither allocatively nor productively efficient, their firms often benefit from economies of scale, since their privileged positions allow them to increase their size. This can shift their cost curves downwards, allowing them to produce and sell their product at lower prices than their perfectly competitive counterparts. Therefore, whilst monopolistic markets remain allocatively and productively inefficient in absolute terms, they can be relatively more efficient than others, if they take advantage of their economies of scale. (I would only target this at a fairly advanced student, as it is higher level analysis / evaluation.) 

Daniel E. Uni Admissions Test .TSA. Oxford. tutor, A Level Economics ...

2 years ago

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