Question: Perfectly competitive industries are believed to be more efficient than either Monopolies or Oligopolies yet...

Question:

Perfectly competitive industries are believed to be more efficient than either Monopolies or Oligopolies yet there are few such industries operating within the U.S. Draft a memo addressed to your Congressman or Senator outlining the case for promoting more perfectly competitive industries and restricting the number of

Monopolies and Oligopolies currently operating in the country.

Expert Solution

Perfectly competitive industries are believed to be more efficient than monopolies and oligopolies because Perfectly competitive firms are price takers in the market which set their price equal to marginal cost of the firm and thus earn zero economic profits. Also, these firms face perfectly elastic demand curves. Thus, if they raise prices their sales will be zero. Also, since price is equal to marginal cost of production they are allocatively and productively most efficient as total surplus is maximized with no deadweight loss in the society.

On the other hand in case of imperfect competition, monopolies and oligopolies are profit maximizers and set a higher price as compared to price in perfect competition. The prices are higher than marginal cost and thus these firms earn super normal profits. Also total surplus is not maximized and there is deadweight loss in the society in case of imperfect competition.

Thus, in order to maximize total surplus in the society there should be promotion of more perfectly competitive industries and number of monopolies and oligopolies should be restricted.

Rahul Sunny answered 2 years ago

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