The Inefficiency of Monopoly

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. To understand why a monopoly is

inefficient, it is useful to compare it with the benchmark model of perfect competition.

Allocative efficiency is an economic concept regarding efficiency at the social or societal level. 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. The rule of profit maximization in a world of perfect competition was for

each firm to produce the quantity of output where P = MC, where the price (P) is a measure of how much buyers

value the good and the marginal cost (MC) is a measure of what marginal units cost society to produce.

Following this rule assures allocative efficiency. If P > MC, then the marginal benefit to society (as measured by
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