Page "Competition law" Paragraph 42

After Mill, there was a shift in economic theory, which emphasized a more precise and theoretical model of competition.

A simple neo-classical model of free markets holds that production and distribution of goods and services in competitive free markets maximizes social welfare.

This model assumes that new firms can freely enter markets and compete with existing firms, or to use legal language, there are no barriers to entry.

By this term economists mean something very specific, that competitive free markets deliver allocative, productive and dynamic efficiency.

Allocative efficiency is also known as Pareto efficiency after the Italian economist Vilfredo Pareto and means that resources in an economy over the long run will go precisely to those who are willing and able to pay for them.

Because rational producers will keep producing and selling, and buyers will keep buying up to the last marginal unit of possible output – or alternatively rational producers will be reduce their output to the margin at which buyers will buy the same amount as produced – there is no waste, the greatest number wants of the greatest number of people become satisfied and utility is perfected because resources can no longer be reallocated to make anyone better off without making someone else worse off ; society has achieved allocative efficiency.

Productive efficiency simply means that society is making as much as it can.

Free markets are meant to reward those who work hard, and therefore those who will put society's resources towards the frontier of its possible production.

Dynamic efficiency refers to the idea that business which constantly competes must research, create and innovate to keep its share of consumers.

This traces to Austrian-American political scientist Joseph Schumpeter's notion that a " perennial gale of creative destruction " is ever sweeping through capitalist economies, driving enterprise at the market's mercy.

This led Schumpeter to argue that monopolies did not need to be broken up ( as with Standard Oil ) because the next gale of economic innovation would do the same.