Which Market Structures Are Efficient?
We now know that for productive efficiency, all firms must be minimizing
their costs and marginal cost should be the same for all firms in any one
industry. For allocative efficiency, marginal cost should be equal to the
market price in each industry. Do the market structures we have
studied in earlier chapters lead to productive and allocative efficiency?
Here is a brief point-form assessment.
Perfect Competition
In long-run equilibrium, each perfectly competitive firm is producing
at the lowest point on its LRAC curve. Therefore, every profit-
maximizing firm is productively efficient.
All firms face the same market price and equate their own marginal
cost to that price, so marginal cost is equated across all firms.
Therefore, in a perfectly competitive industry with profit-maximizing
firms, the industry as a whole is productively efficient.
If perfect competition were the market structure for the whole
economy, price would be equal to marginal cost in each industry,
resulting in allocative efficiency across the entire economy.Monopoly
A monopolist’s profits will be maximized when it adopts the lowest-
cost production method, which means that a profit-maximizing