Question

Is pure competition a "desirable" market model for all industries? Should industries aspire for pure competition? Why or why not? Think of an industry that does not function in a purely competitive market currently. Describe the changes that would be required, if this industry wanted to function under pure competition.

Answer 1

For most industries, perfect competition is a desirable model. Industries can achieve Pareto efficiency and resources can be allocated in a manner that it is possible to make one agent better off without making the other worse off. In perfect competition marginal rate of technical substitution between any pair of goods is equal for all consumers. Maximum welfare is achieved by economic efficiency, which is possible under perfect competition. Market imperfection leads to deadweight loss that is a market failure. So industries should aspire for pure competition.

Assume an industry works as a monopoly. They will charge a higher price than that of industry under perfect competition and will produce less quantity. Therefore this industry is not benefited for consumers and create a deadweight loss.

The industry should remove entry barrier, should charge a lower equal price which is equal to market price. The industry should act as a price taker to function under perfect competition.