<p>Perfect competition in the economy leads to the theoretical presumption that with firms entering the market when prices are above their average total costs and leaving when they are below average total costs, the equilibrium point comes when prices are equal to average total costs, which in turn is equal to each continuing firm's marginal cost at a point where these marginal costs are increasing.  For each firm, their marginal revenue will be equal to the price set by the market. Consumers will see no firm whose marginal cost is below the market price, and so should regard the result as efficient. </p>

<p>With increasing returns to scale, marginal costs are never increasing for an individual firm.  The effect is to encourage the emergence of a single firm taking the entire market and having pricing power.  This natural monopoly will lead to that firm seeing that its marginal revenue is below its price (if it lowers prices then it may gain new customers at that new price but it will lose money on existing customers) and when it maximises profits by setting prices at the point where its marginal revenue is equal to its marginal cost, that price will be higher than its marginal cost, and so be seen as economically inefficient from the perspective of consumers.   </p>

CC BY-SA 3.0
2016-08-03T07:46:16.813Z
https://en.wikipedia.org/wiki/File:MonopolyPower3-Wiki.JPG illustrates some of these points, part of the article on [monopoly prices](https://en.wikipedia.org/wiki/Monopoly_price)
Henry
CC BY-SA 3.0
2016-08-03T07:38:45.870Z
2016-08-03T07:38:45.870Z
Henry
<p>How the presence of a sector with increasing returns to scale in a "perfect" economy may lead to market failure ? Can sb explain for me with the support of charts ? </p>

CC BY-SA 3.0
2016-08-02T07:07:33.947Z
I invite you to read books related to economic cycles. The elements quitting the perfect curves of unlimited growth are mixed endogenous and exogenous elements. Don't forget, the economy is open ! Aymen Fassi
Aymen Fassi
CC BY-SA 3.0
2016-08-02T17:19:44.093Z
You question is a little too vague. What do you mean by a "perfect" economy? What framework/model (e.g. GE or partial equilibrium) are you considering?
Herr K.
<microeconomics>
How the presence of increasing returns to scale lead to market failure
ChocolateU
# How the presence of increasing returns to scale lead to market failure

(Asked by: username_0 on 2016-08-02)

How the presence of a sector with increasing returns to scale in a "perfect" economy may lead to market failure ? Can sb explain for me with the support of charts ?

**Tags:** microeconomics
> **Comments:**
> **username_1**: I invite you to read books related to economic cycles. The elements quitting the perfect curves of unlimited growth are mixed endogenous and exogenous elements. Don't forget, the economy is open ! Aymen Fassi  
> **username_2**: You question is a little too vague. What do you mean by a "perfect" economy? What framework/model (e.g. GE or partial equilibrium) are you considering?  

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## 1 answers

### Answer by username_3 on 2016-08-03. Score: 1

Perfect competition in the economy leads to the theoretical presumption that with firms entering the market when prices are above their average total costs and leaving when they are below average total costs, the equilibrium point comes when prices are equal to average total costs, which in turn is equal to each continuing firm's marginal cost at a point where these marginal costs are increasing. For each firm, their marginal revenue will be equal to the price set by the market. Consumers will see no firm whose marginal cost is below the market price, and so should regard the result as efficient.

With increasing returns to scale, marginal costs are never increasing for an individual firm. The effect is to encourage the emergence of a single firm taking the entire market and having pricing power. This natural monopoly will lead to that firm seeing that its marginal revenue is below its price (if it lowers prices then it may gain new customers at that new price but it will lose money on existing customers) and when it maximises profits by setting prices at the point where its marginal revenue is equal to its marginal cost, that price will be higher than its marginal cost, and so be seen as economically inefficient from the perspective of consumers.

> **Comments:**
> **username_3**: https://en.wikipedia.org/wiki/File:MonopolyPower3-Wiki.JPG illustrates some of these points, part of the article on [monopoly prices](https://en.wikipedia.org/wiki/Monopoly_price)  

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