A characteristic of perfect competition is that it secures an efficient allocation of resources when there are no externalities in the market: resources are used up to the point where their marginal cost equals their marginal value – as measured by the price that consumers are willing to pay. But a monopoly structure does not yield this output. Consider Figure 10.9.
A monopolist maximizes profit at 
. Here the value of marginal output
exceeds cost. If output expands to Q* a gain arises equal to the area ABF. This is the deadweight loss associated with the output 
rather than Q*. If the monopolist’s long-run MC is equivalent to a competitive industry’s supply curve, then the deadweight loss
is the cost of having a monopoly rather than a perfectly competitive market.
The monopolist’s profit-maximizing output 
is where MC equals MR.
This output is inefficient for the reason that we developed in Welfare economics and externalities: if output is increased beyond 
the additional benefit exceeds the additional cost of producing it. The additional benefit is measured by the willingness of
buyers to pay – the market demand curve. The additional cost in that figure is the horizontalMC curve under the assumption of constant returns to scale. Using the terminology from Welfare economics and externalities, there is a
deadweight loss equal to the area ABF. This is termed allocative inefficiency.
Allocative inefficiency arises when resources are
not appropriately allocated and result in deadweight losses .
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