Reasons why monopolists do not exhibit resource allocative efficiency

1. The demand curve for a perfectly competitive firm is flat because there are many substitutes available. Monopolists, on the other hand, have a downward sloping demand curve. This means that they are price-makers; they can influence price by changing output. The perfectly competitive firm is too small to do this.

Like the competitive firm, the monopoly's output rule is MR=MC. The price charged to maximize profit is higher on the demand curve than the price that maximizes total revenue. A firm is allocatively efficient when its price is equal to its marginal costs (that is, P = MC). Because the monopolist will choose the output where profit is maximized, it does not produce where P = MC.

2. False. The monopolist must still operate within the constraints of the demand curve. The demand curve is downward sloping, but it still implies a price for every output. In order to obtain a particular price, it must also choose a particular output. It cannot get any price it wants for it any output.

3. There is a dead-weight loss associated with the reduction in quantity. The total social surplus is smaller under the monopoly allocation than under the competitive allocation. Because the monopolist raises the price and restricts the quantity, relative to the competitive equilibrium, consumer surplus is much smaller and producer surplus is much larger; a lot of the surplus gets transferred from the consumer to the monopolist.

4. Individuals each seek to maximize their marginal utility. This makes them rational. However, because of market inefficiencies, sometimes maximizing their marginal utility is not in the best interest of society. For example, when people burn gasoline, they are choosing the means of transportation that best suits their needs. However, the cost of pollution is not factored into the price of the gasoline. If it were, the cost may be so high that they would choose another mode of transportation.