Is monopolistic competition good for society Can policy advi

Is monopolistic competition good for society?

Can policy advisors improve market outcomes?

Solution

In the monopolistic competition, the source of inefficiency is the markup of price over marginal cost. Because of this markup, some consumers whose willingness to pay is more than MC but less than price will be deterred from buying these goods. Thus it creates a deadweight loss in the monopolistic market. As in monopolistic competition, differentiated products are produced, a consumer can choose from a vast section of goods so it creates a positive externality. On the other hand, the price is higher than the perfect competition so it creates a negative externality. As a whole, it creates a DWL, and not good for society as a whole.

There is no easy way for policymakers to correct this market outcome. To enforce MC pricing policymakers should regulate all firms in a monopolistic market. Because the differentiated products in this market are so common in the economy, the administrative burden of these regulations would be immense. Moreover, Monopolistic competitors already make 0 profit, now if they lower price for equalizing with MC, it would cause them making losses. To keep these firms in the business, the government would need to help them for covering losses. Policymaker decides it is better to live with the inefficiency of monopolistic pricing, instead of raising taxes to pay for government subsidies