Evaluating Perfect Competition & Monopoly (Summary)

Evaluating Perfect Competition & Monopoly (Summary)

1. Economists evaluate perfect competition and monopoly using efficiency and welfare criteria.

   • The main efficiency concepts are technical efficiency, productive efficiency, X-efficiency, allocative efficiency, static efficiency and dynamic efficiency

2. Providing we ignore dynamic efficiency conciderations, perfect competition wins over monopoly in terms of being productively and allocatively efficient, and also X-efficiency.

3. However, monopoly can be justified by dynamic considerations, particularly through its ability to reduce prices over time as a result of benefiting from economies of scale and innovation in new products and methods of production.

4. By restricting output and raising prices, monopolies transfer consumer surplus to producer surplus, and also trigger a net welfare loss.