Question

2. Monopolists are neither productively efficient nor allocative efficient, and perfect competition is both productively efficient and allocatively efficient. However, Pareto optimal requires it is impossible to make one person better off without making at least one other worse off.

Ture or false. And why.

Answer 1

Answer : 2) The answer is "True".

The productive efficiency occur at that output level where MC (Marginal Cost) = Minimum ATC (Average Total Cost) occur. The monopolist always produce that output level where ATC is not minimum. So, the monopolist is not productively efficient. But in perfect competition the ATC become minimum on production level in long run. Hence in long run the perfect competition is productively efficient.

The allocative efficiency occur at that output level where MC = AR (Average Revenue) occur. For monopolist the AR curve is double of MR (Marginal Revenue) curve. This means that for monopolist, AR = 2 * MR. A monopolist always produce that output level where MR = MC occur. As for monopolist AR is double of MR hence at monopolist production level MC = AR does not occur. For this reason the monopolist is not allocatively efficient. But for perfect competition at production level MC = AR occur. Hence the perfect competition is allocatively efficient.

In case of Pareto optimal outcome level all available persons gets their efficient outcomes. In this situation if modifiation is required then at least one person worse off is required to make one person better off. So, the given statement is true.