B2.01.12: Allocative Efficiency under conditions of Monopoly

Question 1

What is allocative efficiency under the conditions of monopoly

Answer 1

Allocative Efficiency (AR = MC) doesn’t exist as monopolies:
- Charge prices (AR) greater than MC hence, exploiting consumers resulting in low consumer surplus
- Output is restricted; Quantity should be higher if allocative efficiency is achieved. This is done to raise prices to increase profits therefore, with low output comes lower choices for consumers
- Goods and services are not following consumer demand
- Quality of goods and services may deteriorate due to lack of competitive forces

Question 2

What do high barriers to entry /exit and imperfect competition allow to happen for monopolies

Answer 2

• As this prevents competitors from entering the market, it allows for supernormal profits to persist in the long run for monopolies thus, monopolies can re-invest these profits in the advancements in technology, innovating new products, R & D etc