Monopolists are often criticized for being inefficient. What does this inefficiency refer to in the context of monopoly markets?

• A. Monopolists are unable to earn any economic profit due to high competition.
• B. Monopolists increase consumer surplus by lowering prices below marginal cost.
• C. Monopolists produce less output and charge higher prices than firms in competitive markets, resulting in deadweight loss.
• D. Monopolists always maximize social welfare by equating price with marginal cost.

Answer: (C)

Verified step by step guidance

1. Understand the concept of efficiency in microeconomics, which typically refers to allocative efficiency where resources are distributed to maximize total surplus (consumer plus producer surplus).
2. Recall that in a perfectly competitive market, firms produce where price equals marginal cost (\(P = MC\)), which leads to allocative efficiency and maximizes social welfare.
3. Recognize that a monopolist maximizes profit by producing where marginal revenue equals marginal cost (\(MR = MC\)), but since the monopolist faces a downward-sloping demand curve, the price (\(P\)) is greater than marginal cost (\(P > MC\)).
4. Analyze the consequences of \(P > MC\): the monopolist produces less output than the socially optimal quantity, leading to a loss of total surplus known as deadweight loss, which represents inefficiency.
5. Conclude that the inefficiency in monopoly markets refers to this deadweight loss caused by reduced output and higher prices compared to competitive markets, which reduces consumer surplus and overall social welfare.