Perfect Markets and Market Imperfections

The perfect market entails a structure of production and exchange in which optimal outcomes, both private and social, are attained efficiently and simultaneously without the need for intervention by nonmarket actors. In other words, the price and profit signals in the market lead automatically to production efficiency at minimum unit cost and to allocative efficiency at the most desired mix of output. In a perfect market, the self-interested behavior of individuals responding to price signals is sufficient to direct society as it answers the basic questions of what to produce, how to produce, and for whom to produce.

The model of the perfect market rests on the assumption of perfect rationality in the utility and profit maximization motives of economic agents (consumers and producers). Additional assumptions ...