Is monopolistic competition efficient?

What will be an ideal response?


Monopolistic competition is not efficient by the requirement for allocative efficiency MSB = MSC. The price equals the consumer's willingness to pay, which is the marginal social benefit and the firm's marginal cost is the marginal social cost. Product differentiation in monopolistic competition means that P > MR, which implies that P > MC at the quantity where MR = MC. Because P = MSB and MC = MSC, the result is that MSB > MSC, which signals inefficiency. However, when compared to the perfectly competitive alternative that all goods are identical, the variety offered by monopolistic competition makes monopolistic competition potentially efficient.

Economics

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