Comparison of economic efficiency of the model of perfect competition Essay

Comparison of economic efficiency of the model of perfect competition with that of monopoly markets - Essay Example Moreover, their ability to exploit economies of scale also allows them to sell their products at very low prices which are often less than the cost price of other sellers, thus allowing the larger companies to easily drive them out of the business3. However, monopoly seller, as mentioned earlier, is highly likely not to satisfy the complete demand for its product so that it could charge a premium price. Therefore, the monopoly seller fails to take the full advantage of economies of scale, unlike many firms in monopolistic, perfectly competitive and oligopolistic markets4. Other than technical, allocative and productive inefficiencies, monopolies are also likely to be X-inefficient. American Economist Liebenstein argued that regardless of the level of production, monopolies are always X-inefficient because of the absence of competitive pressures5. Therefore, there costs of production are always higher than it would be within perfectly competitive on even monopolistic markets. The same is true because monopolies sellers are most likely to own technologies, assets, and machines that are not operating at their fullest or which are not needed. Furthermore, they are also likely to overpay people, thus leading to cost inefficiencies6. In presence of competition, firms spend great deal of time and energy over ensuring that they decrease their costs to utmost possible. Consider the example of the US airline industry where strong competitive pressures have forced companies to seek more cost effective pressure. Competition forced Southwest Airlines to create a new business model aimed at cost effectiveness where the company flies its aircrafts for more than 11 hours a day, uses same aircrafts for reducing maintenance and training costs, flies short haul, uses dynamic...This paper is an attempt to explore the economic efficiency outcomes of monopoly markets with that of perfect competition markets. Furthermore, the paper would also attempt to present a possible government policy to improve efficiency within the markets. The focus of policymakers should be at creating policies and programs that facilitate competition within various markets, especially within monopolies markets. However, policymakers should draw a line for their intervention. Even in the worst times, direct government intervention or control is not a viable long-term option for creating efficiency because not only it is inefficient but ineffective. The only policy that governments should pursue is to ensure that monopolistic and oligopolistic markets could move towards a perfectly competitive market. Interestingly, in many cases, it is the existing government policy and structure, which creates the costs and hurdles for new entrants to enter into the market. Therefore, governments all over the world should try to follow the economic models of countries like Hong Kong, Singapore, Australia, New Zealand and Switzerland where the government intervention within the markets is minimal. Furthermore, the cost of starting up a business, running the business and winding up the business are also much lesser than the rest of the world. The focus should be on reducing the excessive costs and time required to start, operate and wind up a business, opening up borders to other companies, facilitating free trade and research and development.