where the firm is producing on the bottom point of its average total cost curve. It can be achieved when goods and/or services have been distributed in an optimal manner in response to consumer demands (that is, wants and needs), and when the marginal cost and marginal utilityof goods and services are equal. a. franchise b. X-efficiency c. natural d. perfectly-elastic. Have a think about them, jot them down and then follow the link to compare your notes with ours. This area is the deadweight welfare loss if a monopolist takes over. It is possible that monopoly is more efficient than many small firms. How a Profit-Maximizing Monopoly Chooses Output and Price. The consumer surplus is the triangle above the price line and under perfect competition, the price will be set where MC=AR. Modification, adaptation, and original content. Allocative efficiency is an economic concept regarding efficiency at the social or societal level. As a result, more people can afford to buy the good in question and a greater level of allocative efficiency is achieved. It was no longer true that all phones were black. If a firm has a monopoly over the provision of a particular service, it may have little incentive to offer a good quality service. 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. This area does not represent either producer or consumer surplus. Monopoly; productive efficiency B. Hine Valle / Getty Images. No, that's not right. The problem of inefficiency for monopolies often runs even deeper than these issues, and also involves incentives for efficiency over longer periods of time. X-efficiency is the degree of efficiency maintained by firms under conditions of imperfect competition such as the case of a monopoly. Economist Harvey … Allocative efficiency is possible only in perfect competition. represents the degree to which the marginal benefits is almost equal to the marginal costs engages in second-degree price discrimination engages in third-degree price discrimination all of the above Monopoly and the Allocative Efficiency of (A) Determining Negligence and Contributory Negli- Productive efficiency means that least costly production techniques are used to produce wanted goods and services. You can see this in Figure 1. Instead, a monopoly produces too little output at too high a cost, resulting in deadweight loss. The consumer surplus is the triangle above the price line and under perfect competition, the price will be set where MC=AR. QUESTIONS FOR REVIEW – MONOPOLY 1. Because firms are all small, no one firm can afford R&D; it would have to be done on a collective or industrial basis. There are counterbalancing incentives here. It will always produce too few of its good or service and will always charge too much for it/them. The diagrams in Figure 1 show the long run equilibrium positions of the firm in perfect competition and the monopolist. Yes, that's correct. Again, with reference to Figure 1, it can be seen that in perfect competition, MR = MC, and MR = price. It refers to producing the optimal quantity of some output, the quantity where the marginal benefit to society of … Monopoly Graph Review and Practice- Micro 4.7. 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. Competitive markets are considered to be statically efficient - both allocatively and productively. 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. Services like call waiting, caller ID, three-way calling, voice mail through the phone company, mobile phones, and wireless connections to the internet all became available. Geoff Riley FRSA has been teaching Economics for over thirty years. 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. However, the monopolist produces where MC = MR, but price does not equal MR. Most people criticize monopolies because they charge too high a price, but what economists object to is that monopolies do not supply enough output to be allocatively efficient. It refers to producing the optimal quantity of some output, the quantity where the marginal benefit to society of one more unit just equals the marginal cost. Yes, that's correct. For the perfectly price discriminating monopolist, price The Allocative Inefficiency of Monopoly. Allocative efficiency occurs where price equals marginal cost in all parts of the economy. No, that's not right. In contrast to this, firms operating in a perfectly competitive environment may lack the incentive to finance expensive research and development programmes, as open access to the market would mean that their competitors would immediately be able to share in the fruits of any success. C. are the basis for monopoly. 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. Thus, consumers will suffer from a monopoly because it will sell a lower quantity in the market, at a higher price, than would have been the case in a perfectly competitive market. 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