The long-term equilibrium position in perfect competition is frequently used to illustrate efficient resource allocation in a free market economy. Explain why this is so and consider what prevents efficiency from being achieved.

The long-term equilibrium position in perfect competition is frequently used to illustrate efficient resource allocation in a free market economy.

Explain why this is so and consider what prevents efficiency from being achieved.

Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 14 marks.
AO3 out of 6 marks.
Indicative content
Responses may include:
AO1 Knowledge and understanding and AO2 Analysis
Explanation of allocative and productive efficiency.
Diagram and/or explanation of the long term equilibrium in perfect competition
Efficiency may not be achieved because of
- Market failure, explained by reference to possible excessive profits, the need for very large investments, the existence of externalities, merit goods and of the need for public goods.
- Government intervention can help overcome this by regulation, taxation, subsides, or ownership aimed at achieving productive and allocative efficiency.

AO3 Evaluation (max 6 marks)
- The concepts of allocative and productive efficiency are mainly theoretica and rest upon fine calculations of marginal changes or precise allocations of costs.
- Government intervention in the production of a good or service does not necessarily achieve productive or allocative efficiency - there may be qovernment failure.