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Let's end this lesson now with
at least two if not three cheers for perfect competition. Here's the deal.
We've proven that a perfectly competitive market does indeed yield most efficient use
and allocation of resources as embodied in productive and allocative efficiency.
Yet, we also know there are several obvious problems.
For starters, perfect competition is rarely,
if indeed ever, totally mirrored in reality.
There are just too many restrictive assumptions to be met,
and where there's buyers and sellers,
homogeneous product, free entry and exit,
perfect information and so on.
Where in the real world can you ever find that?
And as we have discussed,
when one or more of these assumptions do not hold,
we get any one of a number of market failures ranging
from perfect competition and externalities to the public goods problem.
So you might ask if perfect competition only very rarely exists in its pure form,
why do we even bother to study it?
Well for one thing, perfect competition gives us
that aforementioned benchmark against which we can
measure the conduct and performance of our other three main forms of market structure,
monopoly, oligopoly and monopolistic competition.
At the same time, perfect competition model also gives us
appropriate guidance as to when and how to
intervene in the market to correct market failures,
as well as how to measure our success at doings.
Of course, this leads us to the other major problem
with perfect competition and it is a big one politically to with,
while the results of perfect competition may well be efficient,
they're not necessarily always fair.
This problem in equity lies in this far more subtle observation.
The efficient allocation of resources achieved by
perfect competition is contingent on the initial distribution of income across the rich,
poor and middle classes.
Let me repeat that. The efficient allocation of resources achieved by
perfect competition is contingent on the initial distribution of income.
The key idea here is that if you change the distribution of income across
the rich and middle class and poor segments of
an economy and a society through income redistribution methods,
you can actually get
a very different efficient allocation of resources and, by implication,
a very different consumption pattern.
So now let's demonstrate our key idea that if you change the distribution of income,
you can actually get a very different efficient allocation
of resources and by implication,
very different consumption pattern.
Let's do so with an example.
Consider then a country like Guatemala where
less than 5 percent of the people control over 90 percent of the wealth.
The patterns of consumption in Guatemala between the very rich
few and the far too many poor are likely to be starkly different.
While the rich few can afford huge villas and
fancy clothes and fleets of limousines and eat steak every night,
many of the poor peasants live in rags and shacks,
eat beans and rice and can't even afford to buy bicycles.
Now, in a world of perfect competition that can be a perfectly efficient outcome,
yet it is also true that if income were distributed more evenly in Guatemala,
we can see an equally efficient allocation of resources,
but one with very different and likely far more robust structure of demand.
Indeed, a lot more people could afford to buy more housing and
refrigerators and air conditioners and motor scooters and small cars,
while the consumption of villas and limos and steaks would go way down.
So, which of these two equally efficient outcomes do you believe is more fair?
To put this another way,
which market outcome would you consider to be more equitable?
And would you be willing to raise taxes on the
rich to redistribute more income or wealth to the poor?
Pause the presentation now to think about this please, and may be jot down a few notes
and thoughts about this.
Well, I suspect that many of you would opt in Robin Hood fashion
for the Guatemalan society that had a more equal distribution of income.
Well, some of you may take the position that the government shouldn't
be meddling in matters of income redistribution.
Here, the only thing I can tell you is that
this type of what we call a normative question,
is not one that can be definitively
answered either way strictly by the science of economics.
In fact, in economics,
it is important to distinguish between two types of questions,
normative or prescriptive on the one hand
versus positive or descriptive on the other hand.
Thus, when we ask whether Guatemala should have
a more equitable income distribution that would
require transferring wealth from the rich to the poor,
this is a normative or prescriptive question because it focuses on what should be.
In contrast, positive or descriptive questions merely ask what is and not what should be.
My point here in making this distinction is that
normative questions are more properly the domain not of economists,
but rather of politicians and philosophers and voters at
the ballot box or revolutionaries in the jungles or deserts or ghettos of the world.
In contrast, the primary role of the economist is
positive or descriptive analysis describing what is rather than what should be.
Having said that however, positive descriptive economics
nonetheless can offer great insights about how
different types of government policies can affect
the distribution of income and consumption.
Therefore, positive economic analysis is essential in many normative policy debates.
In the next lesson,
we will provide considerable fodder for
the great normative debates over imperfect competition.
In the meantime, please remember that economics is not
something to be memorized but rather something to conceptualize.
So as you study it, think about it too.
Your job and your business just might depend on it.
University of California, Irvine.
I am Peter Navarro.
Dr. Peter NavarroProfessor
