There are 2 types of economic efficiency static and dynamic efficiency. Static
efficiency measures how efficient a firm is at the moment. There is allocative and
productive efficiency for static efficiency. In allocative efficiency AC = MR and it
measure the value placed on the good by consumer equals the cost of the resources
use to produce that good. Also, it is the optimal amount of good and service for
producer to produce (social cost = social benefit). Productive efficiency equal lowest
point of AC curve. In this point, producer use its input most efficiently.
Dynamic efficiency measures the potential for firm to become more efficient in the
future. It looks at consumer choice and quality of good and services provided.
In perfect competition, a firm can achieve both allocative and productive efficiency
in long run. A firm in perfect competition is always allocative efficient in short run
but rarely productive efficient. In the diagrams below we see both short run and
long run eq. Note that the diagram 1 only shows the short run eq. as a firm in the
perfect competition due to lack of barriers to entry, firms cannot make abnormal
profits in the long run (diagram 1 is firm making abnormal profit).
Monopoly is when one firm is in the market and monopoly is a price-maker.
Therefore, monopoly experience downward sloping demand curve. In the diagram
below, we can see both short run and long run eq. for monopoly. This is because
barriers to entry allow the monopoly to make abnormal profit in long run. We can
see the monopolist is neither allocatively nor productively efficient.
Relevant diagram here….
In terms of dynamic efficiency monopolies have the advantage of being able to earn
Abnormal profits in the LR. This may allow them to invest in expensive R and D and
thus provide consumers with better products and more choice.
However the monopolies may lack incentives to cut costs and improve the quality of
goods and services because they can get away with inefficiency due to a lack of
choice from consumers. So in terms of dynamic efficiency it really does depend upon
the nature of the industry and product being produced. If in pharmaceuticals where
RD is very important, monopolies may be more efficient than a competitive market.
Also relevant if time allows is a comparison between pricing . Generally price
charged will be higher under a monopoly unless the monoly is a natural monopoly.