Compare allocative efficiency under perfect competition and monopoly
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Productive efficiency refers to a situation in which output is being produced at the lowest possible cost, i.e. where the firm is producing on the bottom point of its average total cost curve. Since the marginal cost curve always passes through the lowest point of the average cost curve, it follows that productive efficiency is achieved where MC= AC.
The diagrams in Figure 1 show the long run equilibrium positions of the firm in perfect competition and the monopolist. We can clearly see that for the perfectly competitive firm, productive efficiency automatically arises as in long run equilibrium MC=AC at point X. However, in the case of monopoly, the firm is not operating on the lowest point of its AC curve (point X ) but is instead operating on some higher point (point S). We can therefore conclude that in contrast to perfect competition, and assuming an absence of economies of scale, the monopolist will be productively inefficient.
Allocative efficiency
Allocative efficiency occurs where price equals marginal cost in all parts of the economy.
Again, with reference to Figure 1, it can be seen that in perfect competition, MR = MC, and MR = price. MC therefore equals price (at point Y), and allocative efficiency occurs. However, the monopolist produces where MC = MR, but price does not equal MR. It can be seen that at the equilibrium output of OQ, price is greater than MC by the distance RZ, and the monopolist could thus be said to be allocatively inefficient.
The diagrams in Figure 1 show the long run equilibrium positions of the firm in perfect competition and the monopolist. We can clearly see that for the perfectly competitive firm, productive efficiency automatically arises as in long run equilibrium MC=AC at point X. However, in the case of monopoly, the firm is not operating on the lowest point of its AC curve (point X ) but is instead operating on some higher point (point S). We can therefore conclude that in contrast to perfect competition, and assuming an absence of economies of scale, the monopolist will be productively inefficient.
Allocative efficiency
Allocative efficiency occurs where price equals marginal cost in all parts of the economy.
Again, with reference to Figure 1, it can be seen that in perfect competition, MR = MC, and MR = price. MC therefore equals price (at point Y), and allocative efficiency occurs. However, the monopolist produces where MC = MR, but price does not equal MR. It can be seen that at the equilibrium output of OQ, price is greater than MC by the distance RZ, and the monopolist could thus be said to be allocatively inefficient.
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