A nondiscriminating pure monopolist is generally viewed as:
A) productively efficient, but allocatively inefficient.
B) productively inefficient, but allocatively efficient.
C) both productively and allocatively inefficient.
D) both productively and allocatively efficient.
The correct answer and explanation is :
The correct answer is:
C) both productively and allocatively inefficient.
Explanation:
A nondiscriminating pure monopolist is a firm that operates as the sole provider of a product or service without charging different prices to different consumers. This type of monopolist maximizes profit by producing at the quantity where marginal cost (MC) equals marginal revenue (MR) rather than where MC equals price (P), which would be the case in a perfectly competitive market. This results in both productive and allocative inefficiency for the following reasons:
1. Allocative Inefficiency:
Allocative efficiency occurs when resources are distributed in a way that maximizes total societal welfare, meaning price (P) equals marginal cost (MC). However, in a monopoly:
- The monopolist sets price above marginal cost (P > MC).
- This leads to underproduction relative to the socially optimal output level.
- A deadweight loss arises, meaning some consumer and producer surplus is lost, and society does not maximize total welfare.
2. Productive Inefficiency:
Productive efficiency occurs when a firm produces at the lowest possible cost per unit, which happens at the minimum point of the average total cost (ATC) curve. However, in a monopoly:
- The monopolist produces at a lower quantity than what would occur in perfect competition.
- This means the firm does not fully exploit economies of scale or operate at the lowest point of the ATC curve.
- As a result, the firm incurs higher costs per unit than necessary, making it productively inefficient.
In conclusion, a nondiscriminating monopolist fails to achieve both allocative and productive efficiency, leading to an inefficient market outcome where consumers face higher prices and lower output than in a competitive market.