Unit 2.11 · Market Failure: Market Power
Allocative Efficiency and Welfare Loss
AO3AO4HLDiagram required
Syllabus Requirement
In perfect competition, efficiency occurs where P = MC. In imperfect markets, welfare loss arises due to restricted output and higher prices.
Assessment Objectives
AO3Synthesis and Evaluation
AO4Use of Appropriate Skills
Summary
This topic discusses allocative efficiency and welfare loss in the context of market power, particularly comparing perfect competition and monopoly. Allocative efficiency occurs when the price equals marginal cost, maximizing social surplus, while monopolies create welfare loss by setting prices above marginal costs, leading to inefficiencies in resource allocation.