Final answer:
Some pros of the maximize shareholder wealth objective include limited shareholder liability, the ease of raising capital, and the potential for both productive and allocative efficiency in perfectly competitive markets.
Step-by-step explanation:
The maximization of shareholder wealth as an objective function has several noteworthy benefits. One significant advantage is that shareholder liability is limited to the amount they have invested in the corporation, which can shield personal assets from company debts or legal judgments.
Additionally, companies often find it easier to raise or borrow money for expansion or other business ventures when they focus on maximizing shareholder wealth, as the potential for profit can attract investment and improve loan terms. Moreover, a company can elect to sell stock as a means of financing growth, giving it flexibility in how it sources its capital.
Furthermore, in the context of economics, when profit-maximizing firms operate in perfectly competitive markets alongside utility-maximizing consumers, the result is an economy that demonstrates both productive and allocative efficiency.
This efficiency implies that the resources are being utilized effectively (productive efficiency) and goods and services are being distributed in alignment with consumer preferences (allocative efficiency), which is achieved when firms produce where price (P) equals marginal cost (MC).