Final answer:
The efficiency loss in a monopolistically competitive market is known as productive inefficiency. This market structure fails to achieve the productive efficiency of perfect competition due to firms pricing above marginal cost and not producing at the minimum of average cost. In the long run, entry and exit in the market lead to zero economic profits but do not result in productive efficiency.
Step-by-step explanation:
The efficiency loss resulting from a monopolistically competitive market is referred to as productive inefficiency. Unlike in a perfectly competitive market where firms sell at the lowest point on the average cost curve due to long-term entry and exit, in a monopolistically competitive market, firms set prices on the downward-sloping portion of the curve. This positioning does not minimize average costs, meaning that goods are not produced at the lowest possible cost — the hallmark of productive efficiency. Therefore, monopolistic competition is not characterized by productive efficiency.
Moreover, while monopolistic competitors can earn short-term economic profits or losses, the process of entry and exit in the industry eventually leads to firms earning zero economic profits in the long term. However, once profits are driven to zero, firms will still not achieve productive efficiency due to the inherent qualities of monopolistic competition which include product differentiation and market power, allowing them to price above marginal cost.