1 Reasons for inefficiency in monopolies 1. 1 Monopolies and pricing http://case-study808.mystrikingly.com A monopoly prices its products where marginal costs meet marginal revenues to maximise profits. Due to the fact that this price is higher than the market price in perfect competition, many consumers are not able or willing to buy at the higher price. This deadweight loss is an allocative inefficiency. Figure 1: Pricing in monopolies and perfect competition The consumer surplus in perfect competition is 1+2+4, and the producer surplus is 3+5. The consumer surplus in a monopoly is 1, the producer surplus is 2+3, and the deadweight loss is 4+5. 1.2 Monopolies and productive efficiency In theory, a monopoly does not have to be less (productive) efficient than perfect competition. In reality, however, almost all monopolies tend to be inefficient. This may be for the following reasons: 1. 2. 1 Pressure for productive efficiency In perfect competition the price within an industry is determined by the market, or in other words, by demand and supply.
