Question

) Explain why government actions that make industries more competitive do not create comparative advantage.

Answer 1

Comparative advantage stems out of the relatively lower cost of the opportunity. This implies that when one firm has comparative advantage in the manufacturing of one good, it can produce the same product at a relatively lower opportunity cost.

In contrast competitive advantage stems out of lowest average cost or productive efficiency so that the firm produces near the minimum efficient scale. A firm that has comparative advantage can have competitive advantage but the opposite may not hold true. So when government actions make industries more competitive, they are not able to generate comparative advantage since it lies in the cost of other products which are sacrified to produce the given good.

Competitive firms are generally able to achieve absolute advantage as a result of government's effort when they are able to produce at a lower absolute cost. But for having comparative advantage they must be lowering their opportunity cost as well which is not influenced as a result of government's effort.