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Firms under monopolistic competition are allocative inefficient whereas firms under perfect competition are. Explain the rationale...

Firms under monopolistic competition are allocative inefficient whereas firms under perfect competition are.

Explain the rationale for markets to emulate conditions of perfect competition

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Answer #1

Answer - Firms in the monopolistic market in short run are able to influence the price and practise price discrimination and product differentiation which causes the inefficiency in market as the consumer surplus decreases.

In the perfect competition , the firms are price taker and in no position to influence the price in the market. The price is fully determined by demand and supply . Hence there is the maximum social surplus generated and consumer and producer surplus are maximised. Thus this is the most efficient market structure.

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