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The conclusion then is that it would be better for economic efficiency if companies were really small so that their production plans would have no effect on the price of their products. That would provide an argument not only for breaking up any legal monopolies and priviligies, but also to enact draconian anti-trust laws which would forcibly reduce the size of many companies.

1.3 Policy Implication For Competition Policy

While most economists would recognize that the neoclassical model has a limited value in identifying how the distinction between price and marginal revenue creates potential economic inefficiencies, many would also recognize how other factors imply that draconian anti-trust laws may not be best for economic efficiency. The reason is the phenonemon known as economies of scale. That means that larger companies will generally be more efficient. The reason for this is that most production involves some form of fixed costs. And fixed costs per produced units will fall as it is divided by a larger number of units. This is of course particularly true in very capital intensive sectors like the automobile sector.

If legislators decided that only small businesses with two or three persons were allowed to produce cars, then cars would cost as much as hundreds of millions, or even billions, of euros per car to produce given the enormous amounts of money that it costs to build car factories, buy all the necessary equipment and raw materials and work on the actual construction of the cars. Not to mention of course, the amount of money it takes in research and development for new car models and features. But with such high costs, almost no one would be able to afford cars and economic efficiency would clearly be far lower, not higher because of the forced break up of large companies. This example might seem a bit extreme, but the logic really applies to all sectors: namely the logic that benefits from economies of scale usually outweigh the negative effects of having marginal revenue below the price for many companies.

Another way in which anti-trust laws could have negative effects is that large companies may be hesitant to expand their capacity and improve their offers to consumers is that they fear that


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