When an industry transitions from a perfectly competitive market structure to a pure monop… — JAMB UTME

When an industry transitions from a perfectly competitive market structure to a pure monopoly under identical cost conditions, what is the effect on allocative efficiency and consumer welfare?

Allocative efficiency is lost because price exceeds marginal cost ( $P > MC$ ), leading to a deadweight loss in consumer welfare.Answer
B
Productive efficiency is maximized because a single firm operates at the absolute minimum point of its average total cost curve.
C
Allocative efficiency increases because the monopolist equates marginal revenue to price ( $MR = P$ ) to maximize societal surplus.
D
Consumer welfare increases because the higher monopoly price expands the triangular region of consumer surplus.

Answer

Allocative efficiency is lost because the monopolist sets price above marginal cost (

P > MC

), causing a deadweight loss in consumer welfare.

Under perfect competition, allocative efficiency is achieved because price equals marginal cost (

P = MC

). When converted to a monopoly with identical costs, the profit-maximizing firm restricts output to where

MR = MC

and charges a price where

P > MC

. This creates allocative inefficiency and reduces total consumer surplus, resulting in a deadweight loss to society.

Step-by-Step Solution

Identify allocative efficiency condition in perfect competition

Under perfect competition, long-run market equilibrium occurs where price equals marginal cost (

P = MC

), maximizing total social surplus (consumer plus producer surplus).

When

P = MC

, the value consumers place on the last unit equals the marginal cost of producing it.

Analyze monopoly profit-maximization behavior

A monopolist maximizes profit where marginal revenue equals marginal cost (

MR = MC

). Because price exceeds marginal revenue (

P > MR

), the monopolist sets

P > MC

The monopoly restricts output and charges a price higher than competitive market equilibrium.

Evaluate the net effect on consumer welfare

The price increase reduces consumer surplus, and part of the lost consumer surplus is not captured by anyone, creating a deadweight loss.

This deadweight loss represents a net reduction in economic efficiency and overall consumer welfare.

Key Concept

Market Structure Comparison: Allocative Efficiency and Deadweight Loss

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