Final answer:
In a perfectly competitive market, the profit-maximization rule of P = MC ensures that the price reflects the willingness to pay of consumers and the societal costs of production, leading to allocative efficiency. Monopolistically competitive markets, by setting MR = MC, do not achieve this efficiency, resulting in higher prices and lower output compared to a perfectly competitive market.
Step-by-step explanation:
When perfectly competitive firms maximize their profits by producing the quantity where P = MC, they also ensure that the benefits to consumers of what they are buying, as measured by the price they are willing to pay, is equal to the costs to society of producing the marginal units, as measured by the marginal costs the firm must pay. This equality signifies that the resources in the economy are being used most efficiently, meaning that every good that provides more benefit than cost to society is being produced. In other words, there is no underproduction or overproduction of goods, leading to allocative efficiency.
In contrast, in a monopolistically competitive market where firms set MR = MC and price is higher than marginal revenue due to a downward-sloping demand curve, P > MC results, indicating that the benefits to society of providing additional quantity exceed the costs. However, monopolistically competitive firms do not produce these extra units, leading to lost net benefits and allocative inefficiency, although to a lesser extent compared to a monopoly.