What is the end result of the creation of a monopoly in terms of market efficiency?

• A. A deadweight loss occurs due to reduced output and higher prices compared to perfect competition.
• B. There is no change in total welfare compared to a perfectly competitive market.
• C. Market efficiency increases because monopolies produce at the socially optimal output.
• D. Consumer surplus is maximized as monopolies lower prices below marginal cost.

Answer: (A)

Verified step by step guidance

1. Understand the concept of market efficiency, which occurs when resources are allocated in a way that maximizes total surplus (the sum of consumer and producer surplus).
2. Recall that in a perfectly competitive market, firms produce where price equals marginal cost (\(P = MC\)), leading to an efficient allocation of resources with no deadweight loss.
3. Recognize that a monopoly maximizes profit by producing where marginal revenue equals marginal cost (\(MR = MC\)), but because the monopolist faces a downward-sloping demand curve, the price (\(P\)) is greater than marginal cost (\(P > MC\)).
4. Analyze the effects of the monopoly's higher price and reduced output compared to perfect competition: consumer surplus decreases, producer surplus may increase, but total surplus decreases due to the loss of mutually beneficial trades, creating a deadweight loss.
5. Conclude that the creation of a monopoly results in reduced market efficiency because the output is lower and prices are higher than in a perfectly competitive market, causing a deadweight loss.