Deadweight losses 2

In a comment to my previous posting, Deadweight losses, Steve claims that Bastard's arguments are correct. Matt Nolan at TVHE replies to Steve and makes all the points I would have made. Thanks Matt.

Let me give you the executive summary of what I was going to say about Steve's more general arguments; actually the summary is due to Schiffman (2004: 1909-1)

According to Auld, Keen is mistaken concerning the distinction between perfect competition and monopoly (or lack thereof—topic 3), and his perception that mainstream modeling ignores dynamics (topic 6). These errors, in Auld’s estimation, are caused by "either a lack of familiarity with the literature, conceptual errors, or both". As Auld shows, perfect competition can be rigorously derived as the limit of a model of imperfect competition (as the number of firms becomes large). Assume that each firm takes competitors’ outputs as given, but recognizes that it has some degree of market power (its own output influences the market price). The ratio of output under this form of imperfect competition to output under perfect competition is n/(n+1) (where n is the number of firms). When standard theory assumes that firms take prices as given, it is making an innocuous assumption; for example, an imperfectly competitive industry with 100 firms will produce slightly over 99% of the perfectly competitive output.

The reference to Auld is Auld, M.C., 2002. Debunking Debunking Economics. Working Paper, University of Calgary. Available at http://jerry.ss.ucalgary.ca/debunk.pdf.