In this article we will discuss about the welfare implications of a perfectly competitive market.
Favourable Features of a Perfectly Competitive Price System:
Such a perfectly competition system yields certain beneficial consequences in long-run equilibrium.
They are listed below:
1. Consumer preferences as reflected in the market-place would be fulfilled. Here P=MC=MU. So, both consumers and producers are satisfied.
2. Society’s resources would be allocated in the most efficient way, both within and between industries.
3. Flexible factor and product prices would ensure full employment of all factors of production.
4. Competition among employers for inputs and among factors for jobs would cause factor owners to be paid their opportunity costs; these would be determined by the respective contributions to total output of each factor, as measured by its marginal product.
5. With consumer incomes and tastes given, aggregate consumer satisfaction would be maximised because goods would be distributed among consumers according to their demands.
Perfect Competition as an Efficient Allocator of Resources:
There are certain welfare implications of perfect competition. It may be argued that an economy consisting entirely of perfectly competitive markets leads to a maximisation of consumer satisfaction. This follows because, in long-run equilibrium, competition forces firms to produce with the least- cost technology available, at the lowest possible average per unit cost, and sell to consumers at a price that just covers this cost.
In addition, P=MC balance implies that consumers pay a price that just covers the cost of the last unit of each kind of good produced. Because of the ease of entry and exit of firms to and from industries, a perfectly competitive economy will quickly re-allocated resources to meet changing consumer preferences or reflect changing supply conditions. Hence, resources are always efficiently allocated in accordance with consumers’ tastes.
Criticisms of Perfect Competition:
There are several reservations about whether perfect competition will assure maximum consumer satisfaction; it is felt that it provides little incentive for technological innovation; spill-over costs and benefits are not captured; there is a lack of product variety; and income distribution may not be ‘equitable’.