Question

Assume a profit-maximizing monopoly and

firms in a perfectly competitive market
have identical cost and revenue conditions.
In which market will a binding price ceiling
result in a more efficient outcome and
why?
The perfectly competitive market will become
more efficient because the deadweight
loss
will decrease
The perfectly competitive market will become
more efficient because consumers will be
able
to purchase greater quantities of the good at
a lower price
The monopoly will become more efficient
because the deadweight loss will decrease
The monopoly will become more efficient
because producers will be able to sell
greater
quantities of the good at a higher price
Both markets will become more efficient
because total economic surplus will
increase

Answer 1

A binding price ceiling potentially leads to a more efficient outcome in a perfectly competitive market compared to a monopoly, as it encourages production closer to the socially optimal output where price equals marginal cost.

Step-by-step explanation:

In a perfectly competitive market, a binding price ceiling may lead to a more efficient outcome compared to a monopolistic market. In perfectly competitive markets, firms produce where price equals marginal cost, leading to allocative efficiency where the social benefits of production match the social costs. This market structure also results in productive efficiency because goods are produced at the lowest possible average cost. However, a monopolist maximizes profit where marginal revenue equals marginal cost, which is at a lower quantity and higher price compared to perfect competition. A price ceiling in a monopoly can potentially reduce the deadweight loss by making the monopolist produce more than it would otherwise and at a lower price, bringing the outcome closer to the socially optimal point of production where price equals marginal cost. Yet, given monopolists’ already restricted output relative to the competitive case, the gain in efficiency is less clear than in a competitive market.