Question

What aspect of monopolistically competitive industries do critics suggest is socially wasteful?

Answer 1

It is called the excess capacity. Firms in monopolistically competitive industries are able to produce a level of output by equating the marginal revenue and marginal cost of production. This ishowever not unique to this market because this is the profit maximizing condition for every firm in every market form.

However the problem lies in the fact that every firm in monopolistically competitive market produces less than the minimum efficient scale. Minimum efficient is scale is the level of output to which minimises the average total cost.

Monopolistically competitive firms do not produce at the minimum average total cost but in a falling portion of average total cost curve. due to this reason there is always an excess capacity which can be utilised but is wasted because of not producing at the minimum ATC.

another source of wastage is the fact that price is always greater than the marginal cost for monopolistically competitive firms. due to this reason there is always a deadweight loss or the efficiency loss which represents the wastage of economy's resources.