No, that's not right. No, that's not right. However, the monopolist produces where MC = MR, but price does not equal MR. Again, with reference to Figure 1, it can be seen that in perfect competition, MR = MC, and MR = price. Allocative efficiency is an economic concept regarding efficiency at the social or societal level. Allocative inefficiency - The monopoly price is assumed to be higher than both marginal and average costs leading to a loss of allocative efficiency and a failure of the market. A. MC therefore equals price (at point Y), and allocative efficiency occurs. This area does not represent either producer or consumer surplus. However, it is also important to consider how efficiently resources are being allocated over a period of time, when, for example, there may be technological advances, and this is the concern of dynamic efficiency. Both productive and allocative efficiency are examples of static efficiency in that they are concerned with how well resources are being used at a particular point in time. Allocative Efficiency requires production at Qe where P = MC. This is because the price that consumers are willing to pay is equivalent to the marginal utility that they get. Yes, that's correct. where the firm is producing on the bottom point of its average total cost curve. It is possible that monopoly is more efficient than many small firms. However, we may argue against monopoly on grounds of efficiency alone. No, that's not right. Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing. MC therefore equals price (at point Y), and allocative efficiency occurs. This topic video considers outcomes for monopoly in terms of allocative, productive and dynamic efficiency and also looks at some arguments in favour of monopoly power in markets. This is a part of the deadweight welfare loss when a monopolist takes over. Hine Valle / Getty Images. This would lead to allocative inefficiency and a decline in consumer welfare. X-efficiency is the degree of efficiency maintained by firms under conditions of imperfect competition such as the case of a monopoly. To understand why a monopoly is inefficient, it is helpful to compare it with the benchmark model of perfect competition. On one side, firms may strive for new inventions and new intellectual property because they want to become monopolies and earn high profits—at least for a few years until the competition catches up. Thus, monopolies don’t produce enough output to be allocatively efficient. Monopoly has been justified on the grounds that it may lead to dynamic efficiency. Therefore, the monopoly does not achieve allocative efficiency either, so many people will not enjoy the product because of its higher price and those who do buy it will enjoy less consumer surplus. Answer: B Reference: Explanation: 56. As mentioned earlier, we have many signals that allocative efficiency is low in the states: empty homes, unused property, and rents that are disconnected from the true valuation of landowners. Productive efficiency refers to a situation in which output is being produced at the lowest possible cost, i.e. As a result, more people can afford to buy the good in question and a greater level of allocative efficiency is achieved. A. shows that such a firm is a price-maker B. shows economies of scale over a large range of output C. is horizontal Allocational, or allocative, efficiency is a property of an efficient market whereby all goods and services are optimally distributed among buyers in an economy. 2. is a perfectly price-discriminating monopolist. Quality of service. Allocative efficiency: occurs where P = MC. However they may face economies or diseconomies of scale. a. below marginal cost, does not achieve resource-allocative efficiency b. above marginal cost, does achieve resource-allocative efficiency ... the firm is termed a _____ monopoly. The rule of profit maximization in a world of perfect competition was for each firm to produce the quantity of output where P = MC. Have a think about them, jot them down and then follow the link to compare your notes with ours. In fact, such practices usually result in a higher level of output than would be achieved if a firm charged a single price to all consumers. Did you have an idea for improving this content? It can be seen that at the equilibrium output of OQ, price is greater than MC by the distance RZ, and the monopolist could thus be said to be allocatively inefficient. This area is the deadweight welfare loss if a monopolist takes over. No, that's not right. This is part of the deadweight welfare loss when a monopolist takes over, but you also need to include area 5 as well. They are statically inefficient, even though their AC may be significantly lower than their smaller 'perfectly competitive' equivalent. Value to buyers is less than cost to seller. Cost to monopolist Value to buyers Efficient Quantity MC = MB Welfare is Maximized! It will always produce too few of its good or service and will always charge too much for it/them. c. natural. 414 2. The allocatively efficient quantity of output, or the socially optimal quantity, is where the demand equals marginal cost, but the monopoly will not produce at this point. Topic pack - Microeconomics - introduction, Section 2.1 Markets - simulations and activities, Section 2.2 Elasticities - simulations and activities, Section 2.3 Theory of the firm - notes (HL only), Section 2.3 Theory of the firm - questions (HL only), Section 2.3 Theory of the firm - in the news (HL Only), Section 2.3 Theory of the firm - simulations and activities (HL only), Section 2.4 Market failure - simulations and activities, Economic efficiency in perfect competition and monopoly. No, that's not right. A. encourage allocative efficiency. However, in the case of monopoly, the firm is not operating on the lowest point of its AC curve (point X ) but is instead operating on some higher point (point S). A monopoly's higher price is like a private tax that exhibits the same deadweight loss that most taxes exhibit. In symmetric country models, trade tends to increase allocative efficiency through the cost-change channel, yielding a welfare benefit beyond productive efficiency gains. The old joke was that you could have any color phone you wanted, as long as it was black. No, that's not right. So can you now summarise the advantages and disadvantages of monopoly? Following this rule assures allocative efficiency. Allocative efficiency is a property of an efficient market whereby all goods and services are optimally distributed among buyers in an economy. Within economists' focus on welfare analysis, or the measurement of value that markets create for society is the question of how different market structures- perfect competition, monopoly, oligopoly, monopolistic competition, and so on- affect the amount of value created for consumers and producers.. Let's examine the impact of a monopoly on the … We can clearly see that for the perfectly competitive firm, productive efficiency automatically arises as in long run equilibrium MC=AC at point X. This is the producer surplus after the monopolist has taken over. This is the producer surplus under perfect competition. 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