Compare the productive and allocative efficiency of monopolistic and perfect competition.

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A monopolistic market has less productive and allocative efficiency than a perfectly competitive market.

In terms of productive efficiency, a monopolistic firm operates at a price that is higher than its minimum average cost. The firm can achieve minimum average cost by increasing its output, but it will not do...

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A monopolistic market has less productive and allocative efficiency than a perfectly competitive market.

In terms of productive efficiency, a monopolistic firm operates at a price that is higher than its minimum average cost. The firm can achieve minimum average cost by increasing its output, but it will not do so because it achieves maximum profit when its output is less than the point where it achieves minimum average cost. In addition, a monopolistic firm wastes resources that could have been used for production on other things like influencing government policies in order to maintain its monopolistic market status.

In terms of allocative efficiency, a monopolistic firm charges a price that is higher than its marginal costs at its optimum output (Marginal Cost = Marginal Revenue). The firm can achieve maximum social benefit by increasing its output, but it will not do so because it achieves maximum profit when its output is less than the point where it achieves maximum social benefit (Marginal Cost = Demand). This results in net loss of consumer surplus and producer surplus, compared with a perfectly competitive firm at its optimal output.

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