Monopoly: Question 3

3. Using appropriate diagrams, explain whether a monopoly is likely to be more efficient or less efficient than a firm in perfect competition.

A firms that is using resources to their maximum efficiency by producing their output at the lowest possible average total cost is productively efficient (AC=MC)
Allocatively efficient firms produce the right amount of output. There is neither under nor over-allocation of resources towards a odd. If the price was higher than the marginal cost, this is a signal that more output is desired, if price was lower than marginal cost, the signal from buyers to sellers is that less output is desired. Only when P=MC is the right amount of output is being produced. You could also write this as AR=MC.
In this diagram, the quantity at which should be produced to be productively efficient is Q1. Q2 would be the quantity which a firm should produce at to be allocatively efficient. But since a monopolistic firm produces at the quantity Q where their marginal revenue is equal to their marginal cost in order to maximize profit, it is neither allocatively efficient nor productively efficient. And they don't have to be because there is no one they have to compete with. This is the total opposite to perfect competition where firms are forced to be using their resources as efficient as possible.

In perfect competition, firms are allocatively and productively efficient when they're breaking even which all firms do in the long run. At this point, for the quantity Q MC=AC and MC=AR, and at the same time it still maximizes profits. This is only possible for firms in perfect competition due to their perfectly elastic demand curve. Since a monopoly has a normal downward sloping demand curve and another curve that represents the marginal revenue, it won't ever be able to be both allocatively and productively efficient.
In conclusion, a monopoly is less efficient than a monopoly than a firm in perfect competition since a firm in perfect competition will eventually always become allocatively and productively efficient in the long run. While a monopolistic firm will only be able to be allocatively or productively efficient if the government regulates it.