Question

The perfectly competitive market structure is considered to be economically efficient. Discuss why this is the case.

Answer 1

For any market to be economically efficient, below two conditions must be satisfied:

- Market is efficient in allocation

- Market is efficient in productivity

Both the above conditions are met by the perfectly competitive market structure.

In the long run, all the goods in the perfect competition are sold at minimum average cost. This ensures that productive efficiency is maintained in the market.

Allocative efficiency on the other hand implies that the combination of goods chosen at the end has to be desired by the society. Marginal Cost is the social cost of producing a good and price is treated as the social benefit derived from purchasing a good. Perfect Competition ensures that P = MC ie. social cost = social benefit. Therefore, allocative efficiency is obtained.

Because of these reasons, the perfectly competitive structure is considered as economically efficient.

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