Question

Which of the following statements about the relationship between perfect competition and efficiency is NOT correct?

(a) In the short run, and assuming no other externalities, a perfectly competitive industry achieves allocative efficiency: that is, it produces the quantity which maximizes short-run gains from trade.

(b) In the long run, and assuming no other externalities, a perfectly competitive industry with free entry achieves productive efficiency: that is, output is produced at minimum average cost.

(c) In the long run, a perfectly competitive industry achieves dynamic efficiency: that is, its members invest in developing new products and improving productive technologies at socially optimal rates.

(d) All three statements above are correct.

Answer 1

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Understand each statement one by one -

(a) the statement is correct.

Allocative efficiency means that resources are used in the production are optimally utilized which gives maximum welfare and a large no. of consumption goods to the society. In the short run, and assuming no other externalities Under perfect competition, the short-run equilibrium of the industry at a price equal to the marginal cost of each firm in the industry. At this equality benefits of the society are maximum because the consumer is paying a price according to his marginal utility and firms are getting its marginal cost of producing the good which maximizes the welfare of the society and short-run gains of the industry.

(b) the statement is correct.

Productive efficiency means that firm is producing its output at the minimum average cost. In the long run, and assuming no other externalities, a perfectly competitive industry earns normal profits by producing at the minimum point of its long-run average cost curve that is why a productive efficiency is attained in the long-run.

(c) the statement is incorrect.

Under dynamic efficiency, the lower and lower average cost of production is obtained over a period of time in the long-run by developing new products and production technologies. this can't be achieved under perfect competition because productive efficiency and allocative efficiency are achieved under both the short-run and long-run.

so, Option C) is the correct answer.