equal the marginal costs to society of that production. In a monopolistically competitive market, the rule for

maximizing profit is to set MR = MC—and price is higher than marginal revenue, not equal to it because the
demand curve is downward sloping. When P > MC, which is the outcome in a monopolistically competitive

market, the benefits to society of providing additional quantity, as measured by the price that people are

willing to pay, exceed the marginal costs to society of producing those units. A monopolistically competitive

firm does not produce more, which means that society loses the net benefit of those extra units. This is the

same argument we made about monopoly, but in this case the allocative inefficiency will be smaller. Thus, a

monopolistically competitive industry will produce a lower quantity of a good and charge a higher price for it

than would a perfectly competitive industry. See the following Clear It Up feature for more detail on the impact
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