Monopoly is allocatively inefficient because
A) the price exceeds the marginal cost of the last unit produced.
B) the firm has no incentive to maximize profits.
C) the opportunity cost exceeds the marginal cost of the last unit produced.
D) the marginal cost exceeds the average cost for the last unit produced.
E) lower costs could be achieved.

Question

Quizplus · Accepted Answer

Allocative efficiency occurs when resources are being used in a way that maximizes societal welfare, where marginal cost equals marginal benefit. However, with a monopoly, the price is set above marginal cost, which leads to a reduction in consumer surplus and a deadweight loss. Allocative inefficiency occurs because the quantity produced is less than the socially optimal level, meaning that the last unit produced generates more benefit than cost (marginal benefit > marginal cost), but the firm does not produce it.

Monopoly Is Allocatively Inefficient Because