ABSTRACT
The assumption of perfect competition is very convenient for justifying laissez-faire economic policies. In neoclassical economic models, the assumption of perfect competition in combination with other assumptions such as the absence of externalities, no transactions costs, perfect information, and rising marginal costs means that prices can be assumed to perfectly reflect underlying opportunity costs. It then becomes possible to conclude that profit maximization by producers and welfare-maximizing behavior by budget-constrained consumers indeed brings about ecient outcomes that maximize overall human well-being. The problem with the assumption of perfectly competitive markets is that there are no perfectly competitive markets in a real economy. Those perfectly competitive markets assumed in neoclassical economic models are a myth, not a reasonable approximation of real world market behavior.
