If real world markets can be made to resemble more closely the model :: Economics

If real world markets can be made to resemble more closely the model of perfect competition, economic efficiency will improve. Explain why Perfect competition is generally regarded as economically more efficient? Chris Simons ============ "If real world markets can be made to resemble more closely the model of perfect competition, economic efficiency will improve." a) Explain why Perfect competition is generally regarded as economically more efficient? (20 marks) The model of perfect competition describes market where there is a high degree of competition. The word "perfect" does not mean that this form of competition produces ideal results or maximises economic welfare in other words, the word "perfect" should not have any normative overtones. A perfectly competitive market must possess four characteristics. Firstly, there must be many buyers and sellers in the market, none of whom is large enough to influence price. Buyers and sellers are said to be price takers. This type of market has many relatively small firms that supply goods to a large number of small buyers. There must be freedom of entry and exit from the industry. Firms must be able to establish themselves in the industry easily and quickly. Barriers to entry must therefore be low. If a firm wishes to cease production and leave the market, it must be free to do so. Buyers and sellers possess perfect knowledge of prices. If one firm charges a higher price than the market price, the demand for its product will be zero as buyers buy elsewhere in the market. Hence the firm has to accept the market price if it wishes to sell into the market (i.e. it must be a price taker). All firms must produce a homogenous product. There is no branding of products and products are identical. There are very few industries in the world that approximate to this kind of market structure. One that might is agriculture. In agriculture there is a large number of farmers supplying the market, none of whom is large enough to influence price. It is easy to buy a farm and set up in business. It is equally easy to sell a farm and leave the industry. Farmers on the whole possess perfect knowledge. They know what prices prevail in the market, for instance from the farming press. Finally farmers produce a range of homogenous products. King Edwards's potatoes from one farm are indistinguishable from King Edwards's potatoes from another. In Europe and in many countries around the world, farming is in certain instances not a perfectly competitive market. This is because governments may interfere in the market, buying and selling to fix a price. Perfect competition is generally regarded as economically more