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Home > Economics FAQs Blogs > Can a monopolist ever be productively and allocatively efficient?

Can a monopolist ever be productively and allocatively efficient?

Relevant Topics

This question pertains to topics in Microeconomics, such as Market Structures, Monopoly, Productive Efficiency, and Allocative Efficiency.

Definitions:

Monopoly: A market structure characterised by a single seller, selling a unique product in the market with no close substitutes.

Productive Efficiency
: A situation in which a good or service is produced at the lowest possible cost. This occurs at the output level where average total cost is at its minimum.

Allocative Efficiency:
A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

Detailed Explanation:

Typically, monopolies are associated with inefficiencies - both productive and allocative.

Productive Efficiency:
A monopoly may achieve productive efficiency in the short run, but often fail to do so in the long run. In the short run, a monopoly can use its market power to maximise profits, which may coincide with the level of output where average total cost is minimised. However, in the long run, due to lack of competition, monopolies face less pressure to minimise costs, leading to 'X-inefficiency', where output is not produced at the minimum possible cost.

Allocative Efficiency: A monopoly rarely achieves allocative efficiency. This is because a monopolist maximises profit by setting output at a level where marginal cost (MC) is equal to marginal revenue (MR), not where MC equals the price (which represents marginal benefit or MB). This typically results in under-production and higher prices compared to a competitive market.

Recent: 

Google Search Engine (Productive Efficiency): Google has a near-monopoly in the search engine market. Through innovation and large-scale operation, it has managed to produce its service at a very low cost. Yet, the lack of substantial competition might reduce its incentive to minimise cost in the long run.

EpiPen (Allocative Inefficiency):
Mylan, the pharmaceutical company that owns the rights to EpiPen, has faced criticism for significant price increases, a typical sign of allocative inefficiency in a monopoly. Consumers willing to pay for the product at a lower price are priced out of the market, indicating a misallocation of resources.

Summary:

While a monopoly can potentially achieve productive efficiency in the short run, lack of competition often results in X-inefficiency in the long run. Additionally, a monopoly is typically allocatively inefficient as it sets output levels where MC equals MR, not where MC equals price, leading to under-production and higher prices compared to a perfectly competitive market.

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