Final answer:
A monopoly is problematically inefficient compared to perfect competition as it leads to higher prices and less output, causing deadweight loss. Unlike perfect competition, where supply and demand determine pricing and maximum efficiency, a monopoly restricts output to maximize profits, undermining allocative efficiency. The deadweight loss is the economic efficiency lost due to the monopoly's price-setting power.
Step-by-step explanation:
The Problem with Monopoly and its Comparison to Perfect Competition
One critical issue with a monopoly is that it leads to inefficiency and deadweight loss due to a lack of competition. Monopolies can set higher prices because there is no competitive pressure to do otherwise, and as a result, they produce less output compared to what would be seen in a perfectly competitive market. This lack of output is not allocatively efficient, and it fails to maximize total welfare within the market.
In contrast to a monopoly, perfect competition is characterized by many firms, each without significant market power and each responding to the market price. In such markets, the forces of supply and demand dictate production and pricing, leading to products being produced at the lowest average cost and sold at a price that reflects the marginal cost of production. This theoretical benchmark ensures that no deadweight loss occurs, and the total surplus (consumer plus producer surplus) is maximized, making it allocatively efficient.
The deadweight loss in a monopolistic market is the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved. In other words, it represents the lost consumer and producer surplus due to the monopoly setting a higher price and producing less quantity than what would have been the case in a perfectly competitive market where prices equal marginal costs.