Question

Assuming the producer charges only one price and marginal cost is constant, how is a monopoly inefficient when compared to perfect competition.

Answer 1

Monopolist produce where MR is equals to MC. In monopoly, firm faces the downward sloping demand curve and marginal revenue curve is below the demand curve. So price the monopoly charge is greater than MC.

In perfect competition, firms are price taker so they face the horizontal demand curve. And marginal revenue equals price. Firm maximises it's profit where MR equals MC. So in perfect competition price is equals to MR equals MC.

Price is equals to MC.

Firms are allocatively efficient when they produce where price is equals to MC. So, monopolist is less allocative efficient than the perfectly competitive firm.

Now if we talk about productively efficient, monopolist output is less compared to the perfectly competitive firm. And thus monopolist produce on higher average total cost curve than perfect competition. In perfect competition, firm produce at minimum ATC. So, monopolist are not efficient in productive too.

So monopolist are less efficient than perfectly competitive market.