Summary
Highlights
Monopolies are inefficient in three key ways: they overcharge, underproduce, and waste scarce resources. This results in them being both productively and allocatively inefficient in the long run.
Unlike perfectly competitive markets where prices are set by supply and demand, monopolies have price-setting power. They can charge the highest price consumers are willing to pay, leading to consumers being overcharged and reduced consumer accessibility and surplus.
Monopolies underproduce compared to a perfectly competitive industry. Due to their optimal output rule (marginal revenue equals marginal cost), they produce less than the socially optimal quantity, leading to allocative inefficiency. This also results in deadweight loss, representing lost consumer and producer surplus.
Monopolies are also productively inefficient. Unlike competitive markets where firms are pressured to minimize costs, monopolies face no such pressure due to high barriers to entry. This lack of competition means they have no incentive to produce at the lowest possible total cost per unit, leading to higher production costs and maintained economic profits in the long run.