In the long run, provided that there are no external benefits or costs, perfect competition will result in an efficient allocation of resources because:

Question

Quizplus · Accepted Answer

In perfect competition, firms cannot charge a price higher than the market price, which is determined by the intersection of supply and demand. This means that the price (P) is the same for all firms in the market. In order to maximize profits, firms will produce the quantity where marginal cost (MC) equals price (P). Therefore, in perfect competition, P = MC. This allocation of resources is efficient because it ensures that the production of each good or service is at the point where the marginal benefit to society (reflected in the price) is equal to the marginal cost of production.

In the Long Run, Provided That There Are No External