Monopoly+is+Not+Allocatively+Efficient

= MONOPOLY is NOT ALLOCATIVELY EFFICIENT =

==== A monopoly is not allocatively efficient because they want to produce at a price that will yield the greatest amount of profit. And because monopolies are price makers they set the price. This allows monopolies to choose what price they are going to charge for their product; therefore, they are not going to be allocatively efficient, producing at the place where price equals marginal cost. Therefore, monopolies are underallocative and have dead weight (crying babies!). This is one of the reasons that monopolies are considered bad to society. ====

==== Nevertheless, a monopoly can achieve allocative efficiency when they sell at the socially optimal price (where P=MC), when the government steps in. This solves underallocation, which yields allocative efficiency, yet it press the government to provide subsides for the monopoly. And in order to pay for these subsidies governments need to raise taxes, which in essence passes the costs on to the people again.This results in somewhat of a wash in a way. ====





A Question to test your reading: If a firm is being allocatively efficient then it is producing where: A. MR = ATC B. Demand = MR C. MR = MC D. Demand = MC

Here are some links that describe why monopolies are not allocatively efficient:
[|Harper College Link: Outline of Monopolies] [|Justin Morton's paper on Monopolies] [|Another little outline on Monopolies] [|A link to a Tutor website describing Monopolies]

ANSWER to question above: D. Demand = MC, this is the same as saying Price = MC