For efficiency quantity is determined when MC = MB. Profit maximizing quantity occurs when MC = MR. So the quantity produced is reduced even though there is some producer surplus to grab. How does this happen? I perceive MC does not include normal benefit but MR takes normal benefit into consideration. Please correct me if I am wrong. Thanks in advance.
If the firm operates in a perfectly competitive environment, then Demand = MB = MR = Competitive Price That is, the MB curve is a horizontal line at the competitive and it is equal to the MR (each extra unit sold increases revenue by the price level since all units are always sold at the same price regardless of the quantity). The outcome of perfect competition is therefore efficient since it induces MC = MB. When the firm is a monopoly, then MR < MB since each extra unit sold decreases the price of all units sold. The MR curve is below the MB curve when demand is downward sloping since marginal benefit gives the willingness to pay for one extra unit, this willingness to pay being smaller than that of the previously sold unit. The MR curve, on the other hand, takes into account the fact that an extra unit sold decreases the price of all units sold. The allocation is inefficient in this case since we have MC = MR < MB. Note that under prefect discrimination, where the monopolist sells all units to consumers at the highest possible price the latter are willing to pay, then MR to the monopolist is equal to MB and the outcome in this case is efficient.
A firm’s profit maximizing quantity is usually not the equilibrium market price (where surplus is maximized). A monopoly or dominant firm in an oligopoly will produce the profit maximizing quantity. Thus the consumer suffers since the sum of consumer and producer surplus is not maximal.