Why is a monopoly inefficient?
Understand the Problem
The question is asking for an explanation of the inefficiencies associated with monopolies, such as how they impact pricing, production, and overall market outcomes compared to competitive markets.
Answer
Monopolies are inefficient because they do not supply enough output to achieve allocative efficiency.
Monopolies are inefficient because they do not supply enough output to achieve allocative efficiency, where the price exceeds the marginal cost (MC) and a lower quantity is sold at a higher price compared to a competitive market.
Answer for screen readers
Monopolies are inefficient because they do not supply enough output to achieve allocative efficiency, where the price exceeds the marginal cost (MC) and a lower quantity is sold at a higher price compared to a competitive market.
More Information
This inefficiency stems from the monopolist's ability to set prices above marginal cost, leading to a deadweight loss in the economy.
Tips
Common mistakes in understanding monopoly inefficiency include confusing it with perfect competition and ignoring the impacts of price setting above marginal cost.
Sources
- The Inefficiency of Monopoly | Microeconomics - courses.lumenlearning.com
- How does monopoly contribute to market failure? - Investopedia - investopedia.com
- Impacts of Monopoly on Efficiency - Social Sci LibreTexts - socialsci.libretexts.org
