Question

1. Most economists will freely admit that finding a textbook example of perfect competition in the real world is unlikely. Can you think of any markets that come close in the sense that the firms involved exhibit price-taking behavior?

2. Adam Smith’s theory of the invisible hand is often used to justify a hands-off approach to market activity. Can you give an example where government intervention in a market led to an inefficient outcome? How about an example where government intervention improved the outcome?

Please answer all of the two questions by one paragraph for each sub-question in one posting.

Answer 1

Perfect competition is a form of market where the industry sets the price equal to the Marginal revenue and every firm takes that price as given. Along with that we have free entry and exit of the firms in the market, no super normal profits in the long run, and perfect information to the customer.

In real world it is quite difficult to find such market with all of the above features; however some industries do come close to such behavior. This includes the internet market in the big giants like Amazon, e-bay, flipkart etc

As the information regarding a particular good is available very easily, the consumer can compare prices, and if the firm is selling a product at super normal profits, the consumer will move on to the other seller. This will force all the seller to follow a single price only where MR = MC = Price. Any firm will not be in the position to influence the market price of the product. They can only act as the price taker, where Price is equal to the Marginal revenue of the product.

Another example is the agricultural industry where the seller can not influence the price of the their produce, if they did, they will loose their market. Thus they have to take the price of the industry only