Question

There are many means of transport for someone looking to travel from Houston to Los Angeles, and many different transportation providers (e.g. various airlines, buses, Amtrak, etc.), so the market for this travel route is competitive. However, why is the competitive equilibrium quantity of travel likely to be too high relative to the efficient quantity? Please answer the question clearly and thoroughly, making use of the relevant economic concepts

Answer 1

Efficient quantity is when demand for quantity and supply of quantity is the same and is in equilibrium. Thus the efficient quantity will be where demand is equal to supply.

With several different transportation providers in place such as airlines, buses, Amtrak, etc. the quantity is more and thus the price should also be low.

As more of the firms are trying to maximize their profitability, they would try to be as competitive as possible and increase their own quantity of transportation means available to the market. Thus they will charge a lower price for a higher quantity of supply, while the demand tends to be high.

Thus the competitive equilibrium quantity of travel is likely to be high because firms want to purposely increase the quantity supplied in order to stay in the game and gain as many customers as possible by lowering their prices and increasing quantity supplied.

Only when they try to increase the quantity of travel for example buses running specific routes, airlines will also try to be in the game, otherwise they lose out on competition. Which is why the competitive equilibrium quantity of travel is high as the increased quantity also leads to lower prices, increasing demand further.