Question

Equilibrium in a perfectly competitive market results in the greatest amount of economic surplus, or total benefit to society, from the production of a good. Why, then, did Joseph Schumpeter argue that an economy may benefit more from firms that have market power than from firms that are perfectly competitive?

Answer 1

Under the perfectly competitive market, there is rise in output or firms tend to producer where P = MC, while monopoly produces where MR = MC. thus, Competitive market produces larger than monopoly market.

Schumpeter believes that innovation is critical factor that promotes and sustains benefit to society. Innovation can not be introduced in perfectly competitive market or very less likely to occur. Under the monopoly market, firm tends to introduce innovation so that profit can be sustained over the long run.

Thus, Schumpeter prefers monopoly over the competitive market.