Final answer:
Excess capacity is most commonly linked to monopolistic competition, where firms operate below their most efficient scale due to product differentiation and competition from many other firms.
Step-by-step explanation:
The concept of excess capacity is most commonly associated with the market structure of monopolistic competition. In this market structure, firms are able to differentiate their products but still compete with other firms that offer similar goods or services. This differentiation means that firms have some degree of market power; however, because there are many competitors, firms cannot fully capitalize on this market power. As a result, they tend to produce below their capacity.
Unlike in perfect competition, where firms produce at the lowest point on their average cost curve, firms in monopolistic competition face downward-sloping demand curves due to product differentiation. Consequently, they are less likely to produce where average total cost is minimized, which is why excess capacity can occur. This differentiates monopolistic competition from oligopoly and monopoly, where firms can often produce closer to capacity due to higher barriers to entry and greater market power.
In summary, the excess capacity tends to be a feature of monopolistic competition due to the effects of product differentiation and the presence of many firms in the market, which results in firms operating below their most efficient scale.