Now the question is whether the competitive market equilibrium \"good\" or \"soc

Question

Now the question is whether the competitive market equilibrium "good" or "socially optimal". One way to answer this question is to find out how much a benevolent central planner who wants to maximize the consumer utility given the technological and labor constraint given by the production function will decide to produce. We assume the central planner is the central command in the economy and there are no markets. Formulate the central planner problem and derive the optimum output produced. 1) Is the competitive “market equilibrium outcome" the same as the "central planner" outcome? What is the conclusion?

Explanation / Answer

Perfectly competitive market leads to the maximum output which is economically efficient. In other words, production tends to be greater than other forms of market. But it is not necessarily equity based. All production decisions are taken based on the demand and supply conditions prevailing in the market. On other hand, all economic decisions in centrally planned economy are taken by the designated central authority. Authority is not bound by the demand and supply conditions. Economic decisions are taken according to the needs of economy. There is no incentive for private initiatives. Hence, centrally planned system is not as efficient as market system. Centrally planned system is relatively stable but inefficient. It does not internalize actual demand and supply conditions in market completely. Hence, competitive market tends to be more efficient and produce more than centrally planned economic system.

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