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

Perfect competition

Perfect competition is an ideal type of market structure where all planners and consumers will have full and symmetric information, no transaction costs, where there are a large number of planners and consumers competing with one another.

In a perfectly competitive market, each planner provides so little of the total that she can sell as much as she can produce at the going price. This means the demand facing the individual planner in a perfectly competitive market is perfectly elastic! Produce all units that add more to benefits than to costs.

In a Pure or perfect competition market structure, the planner will have these conditions

• All planners sell an identical product.
• All planners are price takers.
• Price is pre-decided they cannot influence it.
• Buyers have complete or "perfect" information—in the past, present and future—about the product being sold and the prices charged by each planner.
• Resources for such planners are perfectly mobile.
• Planners can enter or exit the market without cost.

Monopoly

A market structure characterized by a single planner, selling a unique product in the market. In a monopoly market, the planner faces no competition, as he is the sole seller of goods with no close substitute.

Following are some outcomes of monopoly market

• Monopolies can maintain super-normal profits in the long run.
• A monopolist with no substitutes would be able to derive the greatest monopoly power.
• The planner can set his own prices without inturruption of anyone else.
• They can charge higher prices and make more profit than in a competitive market.

So from the above discussion Planner should go with Monopoly market so that his unique ides will be appriciated and awarded what they deserve. He will be making better earning in that market but this will be only possible if he is in small town and and it will be easy for him to create a monopoly there.