An imperfectly competitive industry is often allocatively inefficient when compared to the performance of a competitive industry,because imperfect competitors

Question

Quizplus · Accepted Answer

Imperfectly competitive firms have market power and can set prices above the marginal cost, which leads to a lower output and higher price compared to a perfectly competitive market. This results in allocative inefficiency, where the price is higher than the marginal cost, and consumer surplus is reduced. While maximizing profits is a characteristic of firms in all market structures, it is the ability to set prices above the marginal cost that leads to allocative inefficiency in imperfectly competitive markets. Obtaining economies of scale and operating in the global economy may provide advantages to firms but do not necessarily cause allocative inefficiencies. Making profits is also not a determining factor as both perfectly competitive and imperfectly competitive firms can make profits.

An Imperfectly Competitive Industry Is Often Allocatively Inefficient When Compared