Question

Consider a market supplied by a monopolist. Why is this market not reaching equilibrium at the socially efficient level?

Answer 1

Monopolies do not supply enough output to be allocatively efficient . They produce where Marginal Revenue is equal to Marginal Cost , which is the profit maximization point . The price set according to the downard sloping demand curve , so the market price is always higher than marginal cost and marginal revenue . So there is no allocative efficient . Also there is no productive efficiency because even in long run , monopolies earn super normal profits , they never break even ( where MC = Minimum of ATC ) .

Also now let us talk about social efficiency . The socially efficient level of output is that quantity that maximizes the sum of the consumer and producer surpluses in the market . It is the most efficient output level because the marginal social benefit of producing and consuming another unit equals the marginal social cost , which occurs in a perfectly competitive market .

A monopoly is a market distortion , dead weight loss occurs . So social efficiency is compromised .