Key Diagrams - Monopoly and Allocative Efficiency

In this revision video we explain why an unregulated monopoly is likely to lead to high prices that cause a loss of allocative efficiency.

Firms with monopoly power can set higher prices than in a competitive market. An unregulated monopoly supplier is highly likely to be allocatively inefficient because in monopoly the price is greater than MC. In a competitive market, the price would be lower and more consumers would benefit from purchasing the good. A monopoly results in dead-weight welfare loss of consumer and producer surplus.

When revising monopoly power in markets please remember to include the various economic efficiency concepts – namely allocative, productive and dynamic efficiency. In theory monopoly can lead to an inefficient allocation of scarce resources, but much depends on the pricing strategies used and also whether the firm with monopoly power does face a degree of contestability. The monopolist can also have their prices regulated.