Why is pure competition considered an unsustainable system in the long run?

• A. Consumers face higher prices due to lack of competition among firms.
• B. Government intervention is required to maintain competitive equilibrium.
• C. Firms earn zero economic profit, making it difficult to cover opportunity costs and incentivize continued production.
• D. Barriers to entry prevent new firms from entering the market.

Answer: (C)

Verified step by step guidance

1. Understand the characteristics of pure competition: many firms, identical products, free entry and exit, and firms are price takers.
2. Recall that in the long run, firms in pure competition earn zero economic profit because any short-run profits attract new entrants, increasing supply and driving prices down.
3. Recognize that zero economic profit means firms cover all explicit and implicit costs, including opportunity costs, but do not earn extra profit beyond that.
4. Analyze why zero economic profit can be seen as unsustainable: since firms only break even, there is little incentive for innovation or expansion, and firms may exit if conditions change.
5. Conclude that pure competition leads to a long-run equilibrium where firms earn zero economic profit, which can make it difficult to sustain production incentives over time without changes in market conditions.