Question

Why is monopolistic competition inefficient in terms of social surplus? Does monopolistic competition provide any benefit to the economy?

Answer 1

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Monopolistically competitive market :

The market power is shown by downward sloping demand curve . The price charge by these firms will exceed marginal cost of production . So the consumer surplus decreases  below the pareto optimal levels you would find in a perfectly competitive market . So the market suffers dead weight loss . Suppliers have excess production capacity . This occurs in short run in this market . Monopolistic competitive markets can lead to significant profits in the short-run, but are inefficient , there is no allocative efficieny . So social surplus is not maximized in short run , when profit is maximized at MR = MC .

Advantages or benefits : No barriers to entry which causes zero economic profit and social surplus maximization in long run , Differentiated but close substitutes cause variety and diversity in choice , another benefit to the economy is competition among related brands and companies which ensures better quality production and check on monopoly power .