Final answer:
Monopolistic competitors are less efficient compared to the benchmark of perfect competition as they produce less output and have higher average total costs, not reaching minimum average total cost due to excess capacity.
Step-by-step explanation:
Monopolistic Competition and Efficiency:
A monopolistic competitor produces too little output compared to the most efficient level. Comparing a monopoly to perfect competition, economists argue that a monopolistic market is not allocatively efficient because it supplies less output than would be socially optimal. This lower output results from the firm's power to set prices above marginal costs, which they can do because they have some degree of market power and face a downward-sloping demand curve.
In terms of productive efficiency, which refers to producing goods at the lowest possible average cost, monopolistic competitors are also inefficient. They do not produce at the bottom of the average cost curve, which is the hallmark of perfect competition. Instead, monopolistic competition results in a higher average total cost as firms have excess capacity. This occurs as firms maintain some degree of market power in the long run, unlike in perfect competition where entry and exit drive firms to produce at the point of minimum average total cost.