Explain reasons for pure competition to fail in achieving the efficiency outcomes it is applauded for.

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Expert Solution

Perfect Competition may turn out to be inefficient due to :

No economies of Scale.

In Perfect Competition there are many small firms producing relatively small amounts. Industries with high fixed costs would be particularly unsuitable to perfect competition. This is one reason why perfect competition. is unlikely in the real world. It means firms cannot benefit from efficiencies of scale.

Dynamic Inefficiency

Due to lack of super normal profit a firm in perfect Competition may not resort to Research and Development. Due to lack of R&D a firm will become static. There will be no improvement in productivity or reduction in costs thus resulting in dynamic Inefficiency.

Perfect Knowledge

Due to perfect knowledge there will be no benefit to produce new technology as it will be shared with other companies, thus reducing the competitive advantage.

Possibility of Market Failure.

If there are externalities in production or consumption there is likely to be market failure without government intervention.

No Product Differentiation

Undifferentiated products prove to be boring to customers as they have no choice or very little choice. Product Differentiation is of immense importance in certain consumer products like cars, clothes etc.

Rahul Sunny answered 1 year ago

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