Question

(c) Firms in the perfectly competitive bubble tea industry are earning economic profits because of a surge in demand for bubble tea. Explain why in the long run, economic profits in this scenario are of less concern, from a public welfare perspective, than economic profits from monopoly.

Answer 1

Perfect competition is a market structure where there are many firms competing with each other. In this market scenario, there are no entry or exit barriers so firms can enter or exit from the market. Each firm offers similar products and they have all the available information. It means no single firm can influence the market.
The firms in the perfect competition can earn a positive economic profit in the short run. However, as there are no barriers of entry so more firms will enter the market which will drag down the profit until it becomes zero.
That is there is no economic profit in the long run in the perfect competition.

The perfect competition is considered an ideal form of the market where resources are allocated efficiently and consumer or society receives the highest benefits. However, such a situation does not exist but still, it should be compared against the monopoly where only a single firm operates. The monopoly market situation is at another end of the spectrum in which consumer welfare is at the lowest and the monopoly firm earns a positive economic profit.