Monopolistically competitive markets may be socially inefficient because

Question

Quizplus · Accepted Answer

Monopolistically competitive markets may have too much or too little entry by new firms, leading to inefficiency. If there is too much entry, firms will compete with each other and drive down prices, leading to lower profits for all firms. If there is too little entry, firms will have some market power and may charge higher prices than they would in a more competitive market. In both cases, the market outcome is not socially efficient.

Monopolistically Competitive Markets May Be Socially Inefficient Because