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Assessment Description The Pareto efficiency is a simple idea, but it is difficult to achieve. Why is this? Provide an example from outside your textbook.

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Final answer:

Productive and allocative efficiency are achieved in perfectly competitive markets in the long run, but other markets often fail to meet these criteria, leading to 'imperfections.' Monopolistic and oligopolistic structures typically cannot match the efficiencies of perfect competition, due to issues like market power and barriers to entry.

Step-by-step explanation:

The concept of Pareto efficiency is a central theme in economics, particularly when analyzing market structures. Productive efficiency occurs when firms operate at the lowest possible cost, producing at points on their production possibility frontiers. Allocative efficiency happens when the goods and services produced are distributed according to consumer preferences; in other words, what is produced matches what is most desired by society (P = MC, where P is the price consumers are willing to pay and MC is the marginal cost of production).

In a perfectly competitive market, these efficiencies are achieved in the long run because numerous firms compete, leading to the cost of goods aligning with the marginal cost of production, and the output mix directly reflects consumer preferences. However, in other market structures, these conditions are rarely met, leading to imperfections. For instance, in a monopolistic market, a single firm controls the market, leading to higher prices and less output than what would be considered allocatively efficient (P > MC). Similarly, in oligopolistic markets, a few firms dominate, which can lead to prices above marginal costs and an output mix that does not necessarily reflect consumer preferences fully.

By comparing these other market structures to the benchmark of perfect competition, we label them as 'imperfect' due to their inability to consistently achieve productive and allocative efficiency. The imperfections arise from various reasons such as market power, barriers to entry, and lack of perfect information, which all prevent the market from reaching the ideal of perfect competition.

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