Question

Productive efficiency and allocative efficiency are two concepts achieved in the long run in a perfectly competitive market. These are the two reasons why we call them “perfect.” How would you use these two concepts to analyze other market structures and label them “imperfect?”

Short answer

If a market fails to produce at the minimum average cost, or is unable to meet the equilibrium of MC=MR, then we call it imperfect.

Step-by-step solution

Definition

A perfectly competitive market is said to be the one where profit-maximizing output is determined by two conditions-

MC = MR

MC cuts the MR curve

This is referred to as the allocative and productive efficiency, i.e. allocation of resources is such that the production is maximum and efficient.

Explanation

A market is said to be imperfect when it is not able to determine the profit-maximizing equilibrium point through the above-mentioned two conditions. If, in the long run, the market is unable to produce at a quantity that is at the lowest of the average cost curve, then such market is said to be failed in meeting the allocative and productive efficiency. Hence, such a market is imperfect.