Final answer:
Adam Smith believed that competition fosters efficiency, as it pressures businesses to reduce prices and innovate, benefiting consumers. He warned against business collusion to raise prices, advocating for a market economy where supply and demand dictate prices.
Step-by-step explanation:
According to Adam Smith, competition fosters efficiency in a market economy. Smith highlighted that when businesses compete, they tend to find ways to reduce their costs and improve their products and services, leading to more efficient operations. This viewpoint suggests that competition pressures businesses to operate more effectively, reducing their prices or failing otherwise, thus benefiting consumers with lower prices and innovative products.
In his seminal work, The Wealth of Nations, Smith warned against collusion among businesses which could lead to higher prices and harm consumers. This insight underscores the importance of maintaining competition to prevent conspiracies or contrivances aimed at raising prices. Smith's analysis also implies that in the absence of competition, prices would tend to increase as businesses would not have the incentive to keep costs down.
Thus, the correct answer to the statement about Adam Smith's view on competition is that it fosters efficiency—a hallmark of a healthy and functioning economy where supply and demand determine prices, not the machinations of monopolies.