Overview
Allocative efficiency in monopolies is a critical concept in economics that highlights how monopolistic firms can lead to inefficiencies in resource allocation. Unlike competitive markets, where prices reflect the true cost of production, monopolies often set prices higher than marginal costs, resul...
Key Terms
Example: The local water supply company is a monopoly.
Example: Allocative efficiency is achieved when the price equals marginal cost.
Example: If a consumer is willing to pay $10 for a product but buys it for $7, their consumer surplus is $3.
Example: Deadweight loss occurs when a monopoly sets prices above marginal cost.
Example: Airlines often use price discrimination by charging different fares based on booking time.
Example: If producing one more unit costs $5, the marginal cost is $5.