Under which circumstance can a monopoly operate more efficiently than a perfectly competitive market?

• A. When economies of scale are so extensive that a single firm can supply the entire market at a lower cost than multiple firms.
• B. When the monopoly faces no barriers to entry.
• C. When the monopoly produces less output than a competitive market.
• D. When the monopoly sets prices equal to marginal cost.

Answer: (A)

Verified step by step guidance

1. Understand the concept of efficiency in market structures: Efficiency often refers to producing at the lowest possible cost and allocating resources optimally.
2. Recall that in a perfectly competitive market, many firms produce where price equals marginal cost (P = MC), leading to allocative efficiency.
3. Recognize that a monopoly typically produces less output and charges a higher price than a competitive market, which can lead to inefficiency.
4. Identify the special case of natural monopoly, where economies of scale are so large that one firm can supply the entire market at a lower average cost than multiple firms could.
5. Conclude that under this circumstance—extensive economies of scale—a monopoly can operate more efficiently than a perfectly competitive market because it minimizes total costs by avoiding duplication of infrastructure and fixed costs.