Question

For the following statement, use economic analysis to explain why you tend to agree, disagree or are uncertain.

1. “Production in a perfectly competitive industry is both productively and socially (allocatively) efficient.”

Answer 1

I completely agree with the statement. Below is the justification:

There are below two kinds of efficiency that needs to be achieved by every market structure:

- Allocative Efficiency: It implies choosing an optimal combination of goods amongst all the optimal combinations present on the PPF which is also socially preferred.

- Productive Efficiency: It implies choosing a combination of goods which lies on the production possibility frontier. At this combination, there should not be underutilization or underutilization of available resources.

Argument 1 :

Now, In perfect competition, the price paid by the consumer is the benefit that the society receives and the marginal cost is the social cost of producing a good. At equilibrium P = MC which implies that Social Benefits derived = Social Cost incurred from producing a good. Hence, perfect competition is allocatively efficient.

Argument 2:

To achieve productive efficiency, the firm must operate at a minimum of the average cost curve. The price charged should, therefore, be equal to the Minimum of Average cost. In Long run, under perfect competition, P = Minimum of AC. Hence, perfect competition is productively efficient.

Both the arguments taken together imply that a perfect competitive industry is both productive and socially efficient.

**if you liked the reasoning, then please upvote. Would be motivating for me. Thanks