Final answer:
A monopoly may be economically efficient only under certain conditions, such as being a natural monopoly; otherwise, they are deemed inefficient as they charge higher prices, produce less output than is socially optimal, and their long-term incentives discourage innovation and improvement.
Step-by-step explanation:
When examining the economic efficiency of monopolies, it's critical to understand that monopolies are generally considered inefficient compared to the benchmark model of perfect competition. A monopoly can potentially be economically efficient if it is a natural monopoly, where a single firm can serve the market's demand at a lower cost than any combination of two or more firms due to economies of scale. However, monopolies typically charge higher prices and do not produce enough output to be allocatively efficient, according to economists. In essence, they fail to produce the quantity of goods that would maximize societal welfare.
Moreover, the issue of inefficiency in monopolies is compounded by their lack of incentives to improve and innovate over time. Monopolies may initially emerge due to competitive pressures driving firms to innovate, but once they achieve a monopoly status with substantial barriers to entry, they may maintain the status quo, producing the same goods without significant improvements, all while making substantial profits. This phenomenon echoes the sentiment by John Hicks, "The best of all monopoly profits is a quiet life," suggesting that monopolies may rest on their laurels rather than continually striving to satisfy consumer demands.