AP MicroeconomicsMarket Structures
Allocative Inefficiency of Monopoly
A monopoly is allocatively inefficient because it produces where price exceeds marginal cost (P > MC), underproducing relative to the efficient level and creating deadweight loss.
Allocative efficiency requires P = MC, so that the value of the last unit to buyers equals its cost to society. A profit-maximizing monopolist sets MR = MC, and since its MR lies below price, the result is P > MC: the firm restricts output and charges a higher price than a competitive market would. Units that buyers value above their marginal cost go unproduced, and the lost mutually beneficial trades form the deadweight loss triangle. This is the standard welfare critique of monopoly.
Formula / Example
Monopoly: P > MC at MR = MC output ⇒ underproduction and deadweight loss.