costs, some of which are created by government regulation and which are quite significant in many sectors. In addition, many sectors are dominated by just a few companies. As a result, the perfect competition models are misleading and unrealistic when it comes to describing real world markets. Instead, alternative models with more realistic models have been developed. But if perfect competition models are so unrealistic that virtually no real world markets live up to it, why do economists keep teaching it? The reason for that is that it describes an ideal state where maximum economic efficiency is achieved, and thus explains why we should work to come as close to that ideal as possible.
But given these problems with the model why should it be considered ideal with perfect competition? The reason is that in the abscence of it, assuming the problem of fixed and semi- fixed costs is taken into account there will be unrealized gains of trade. And the reason for that is that if companies do not face a horizontal demand curve, then if they decide to increase output, this could lower the price they receive for their products. And since price discrimination is often difficult in practice, this would imply not only a lower price for the additional products they sell, but also a lower price for the products they produced before that production increase. The lower price for the previous production level means that revenue falls. This in turn implies that the additional revenue that companies will receive if they increase production, what economists likes to call the marginal revenue will be lower than the price the new customers pay.
For society, this is not a loss as the loss for the company will be compensated by how previous customers will see their purchasing power rise. And as the new customers will receive products they consider to be worth more than the price they paid for it, society as a whole will gain. But since, again, the company will lose and since the company will avoid any strategy which will cause them losses, this means that they will not lower the price which in turn means that the potential gains that could be made will not be realized. This situation shows that what economists call positive externalities will exist. The concept of positive externalities means that certain actions will bring benefits to others, but as many individuals or companies will only look after their self- interest they will overlook these benefits to others and so in many cases abstain from actions that