Is the outcome in a monopolistically competitive market desirable from the standpoint of society as a whole? Can policymakers improve on the market outcome? There are no simple answers to these question.
One source of inefficiency is the markup of price over marginal cost. Because of the markup, some consumers who value the good at more than the marginal cost of production (but less than the price) will be deterred from buying it. Thus, a monopolistically competitive market has the normal deadweight loss of monopoly priscing.
Although this outcome is clearly undesirable compared to the first-best outcome of price equal to marginal cost, there si no easy way for policymakeers to fix the probelm.
Another way in which monopolistic competition may be socially inefficient is that the number of firms in the market may not be the "ideal"one. That is, there may be too much or too little entry.
In the end, we can conclude only that monopolistically competitive markets do not have all the desirable welfare properties of perfectly competitive markets.
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