Question

2. In class we have seen that, in a perfectly competitive market, market equilibrium is efficient.

a. (5) What do economists mean by efficient? (i.e. Why do we characterize market equilibrium as efficient?)

b. (5) What is missing in the concept of efficiency? Give an example of a market in which we might not be as concerned about maximizing efficiency.

Answer 1

By efficient market we mean that point where the suppliers supply optimal quantity into the market. For example in perfect competition the suppliers supply quantity hoti that level where the demand curve intersects the marginal cost curve or quantity demanded is equal to quantity supplied or, price is equal to marginal cost.

The firms attempt to produce maximum output using the available resources.

The firms are able to produce that level of output where there is no dedweight loss in the market because demand is equal to supply.

B. The most significant concept that is missing is property rights. When we are determining the maximum efficiency then we are ignoring the concept of property rights. For example firms operating in perfectly competitive market may be producing or emitting pollutants into the environment thus government will implement certain policies to reduce the emission as a resultant the dead weight loss will be there hence inefficiency.

Monopoly, oligopoly are some of the market that are inefficient and don't wish to upgrade. Monopolist maximizes profit at the point where MR = MC.