In a monopsony, the marginal factor cost is always equal to the marginal revenue product, leading to socially optimal production levels.

In a monopsony, a single buyer controls the market for a factor of production, like labor. This buyer sets the wage and hires workers based on the marginal revenue product, which is the additional income generated from hiring one more worker. However, in a monopsony, the marginal factor cost, or the cost of hiring that extra worker, can be higher than the wage paid because the buyer must raise wages for all workers to attract more. This means that the quantity of labor hired is less than what would be socially optimal, where marginal cost equals marginal benefit. For example, if a factory is the only employer in a town, it might pay workers less than their worth, leading to fewer workers than needed for maximum productivity.