Disadvantages of Perfect Competition
- There is a great deal of duplication of production and distribution facilities amongst firms and consequent waste.
- Economies of scale cannot be taken advantage of because firms are operating on such a small scale. Therefore although the firms may be highly competitive and their prices may be as low as is possible, given their scale of production, nevertheless it is a higher price that could take advantage of economies of scale.
- There may be lack of innovation in a situation of perfect competition. Two reasons account for this:
i. The small size and low profits of the firm limit the availability of funds for research and development
ii The assumption of free flow of information, and no barriers to entry, implies that innovations, will immediately be copied by all competitors, so that ultimately individual firms will not find it worthwhile to innovate.