Question

Suppose a social planner is able to decide whether a particular industry will operate under a perfectly competitive market structure or a monopoly. 1. (8 points) Explain how the outcomes under these two market structures typically differ and make a suggestion to the social planner about which one to choose based on your answer. 2. (2 points) Suppose the social planner tells you that, given the particular circumstances in this market, the total quantity produced under the two scenarios would be the same. What could those circumstances be? Explain.

Answer 1

1) In a perfect competitive market there are numerous buyers and sellers selling homogenous products and no one is able by his own actions to influence the market price, since all have access to full and immediate knowledge of the price at which the trading is currently talking place.

Hence, Social planner in perfect market competition have to produce large number of output, just to maximize profit. Because in this social planner have to adopt price which has been decided in the market.

While,

When there is an only one seller or one producer or one firm it is said to be monopoly market. The single seller supply the commodities to the entire market the product supplied by the monopolist is not have close substitutes. They are some many restrictions for other produces to enter into the market as a result monopoly has no competition in the market.

Here social planner can adopt his own pricing policy, so if firm will sold less amount of units, still it can desirable profit.

So depending of firm desire, if firm wish to sell less number of units and want maximum profit, then social planner should adopt monopoly. Or If firm can produce huge output and ready to adopt market price, then social planner should go for prefect market competition.

2). This two circumstances could be:

a). When there is inelastic demand for the product.

When there is inelastic demand for the product, the social planner would produce same amount of output in both the market. Whether in prefect market competition or monopoly.

b). When have limited resources to produce number of output. Ie. Firm cannot produce more than x unit of output due to limited availabilitiy of resources. Ie. Raw material.

Or When social planner capacity is limited to x units of output. There is limited ability of firm to produce output ie. Other than raw material.