Imperfect competition

As an economics student (a few years ago) I learned the perfect competition model and through the years I have come to like it. The problem is that except for a few small segments of our economy, the model does not reflect reality. Here is my theory as to why not.

One of the features of perfect competition is that there are no profits. There should be returns on labor and capital but if a firm is making profits, others will be attracted to that business. The increased supply will force down prices until no producer is able to make a profit.

If you are in business and want to make a profit you need to find some way to restrict competition. An effective way is to get the government to support you with legislation. I suspect that most, if not all, economic legislation works to limit competition.

For example, in Canada radio and television broadcasters must have a license from a regulatory body. This is said to protect the public interest and ensure a minimum Canadian content. It also limits competition and ensures those people with broadcasting licenses make tons of money.

Legal restrictions on competition are good for the protected businesses, however they come as an extra expense to consumers. And consumers don’t have a very strong lobby. These restrictions also distort the efficient operation of the economy.


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