Chapter 9: Problem 23

Is a monopolist allocatively efficient? Why or why not?

Short Answer

Expert verified

A monopolist is not allocatively efficient because they charge a price higher than the marginal cost at the profit-maximizing level of output. This leads to deadweight loss in the market and a less than optimal allocation of resources, as consumers are not able to consume the product at the efficient level where the price equals the marginal cost.

Step by step solution

Definition of Allocative Efficiency

Allocative efficiency occurs when the price consumers are willing to pay for a product equals the marginal cost of producing the product. This means that resources are being allocated in the most efficient way, and there is no deadweight loss in the market.

Defining Monopolistic Behavior

A monopolist is a firm that has exclusive control over the supply of a product, and there is no close substitute for that product. Monopolists typically maximize their profits by restricting output and charging a higher price than would be observed in a perfectly competitive market.

Monopolist's Pricing Strategy

A monopolist determines the profit-maximizing level of output by setting marginal revenue (MR) equal to marginal cost (MC). However, the demand curve faced by a monopolist is downward sloping, meaning that they have to lower the price to sell more units of their product. Thus, the marginal revenue curve lies below the demand curve and the price charged by the monopolist is higher than the marginal cost at the profit-maximizing level of output.

Comparing Monopolist's Pricing to Allocative Efficiency

Since the monopolist charges a price higher than the marginal cost at the profit-maximizing level of output, they are not allocatively efficient. In other words, the price consumers pay for the product is greater than the cost of producing an additional unit, which leads to deadweight loss in the market.

Conclusion

A monopolist is not allocatively efficient because their pricing strategy results in a price that is higher than the marginal cost of production. This leads to an allocation of resources that is less than optimal, as consumers are not able to consume the product at the efficient level where the price equals the marginal cost. Therefore, monopolists generate deadweight loss in the market and are not considered to be allocatively efficient.