True or False? If every market were competitive, then the whole economy would be characterized by efficiency.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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This statement is true.  This is because perfect competition is the one market structure that is completely efficient.

When a market is in perfect competition, it is also efficient.  What this means is that it produces the most possible units of product.  It would not be possible to improve the amount of satisfaction experienced by society by making more or less of the product.  This is because, in perfect competition, marginal costs always equal marginal revenues.  Firms are price takers and cannot set their prices any higher than any other firm.  Since their products are homogeneous, increasing their prices would lead to a complete loss of market share.  Therefore, they continue to produce enough product to allow marginal costs to equal marginal revenues.  This is not true in any other market structure.  In other market structures, marginal revenues exceed marginal costs, firms make economic profits, and consumers do not get as much product as they would prefer.  Because perfect competition brings about efficiency, the statement in this question is true.

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