Question

In monopolistically competitive markets, neither allocative nor productive efficiency is realized" explain.

Answer 1

Monopolistic competition is a type of market which operates under imperfect competition so that many producers sell products that are differenciated from one another.They are never efficient from the economic point of view.The source of the market inefficiency is given by two conditions.First,at its optimum output,the firms charge price that exceeds marginal costs and so there will be a net loss of consumer and producer surplus.Second,the firms operates with excess capacity.the firms profit maximizing output is less than the output associated with minimum average cost.

Productive efficiency occurs when a market is using all the given resources efficiently and it occurs when the product's price is set at its marginal cost which is also equal to the product's average total cost.In a monopolistically competitive market,the firms always set the Price greater than their Marginal cost so,the market can never be productively efficient.

Allocative efficiency occurs when a good is produced at a level that maximizes welfare of the society.It happens when a product's price is equal to its marginal benefits which is also equal to the product's marginal costs.In a monopolistically competitive market,the price of a good always exceeds its marginal costs so,the market can never be allocatively efficient.