Monopolistic competition gives rise to waste of resources and inefficiencies. These arise mainly due to
(i) selling costs and
(ii) existence of excess capacity.
Selling costs add to each firm's expenditure, but they merely shift demand from one firm to another, adding a bit of extra demand. Thus overall production remains virtually same while overall expenses increase. If these expenses were incurred on additional production, it would have added to availability of goods. Thus excessive selling costs are a waste of resources. Excess capacity level output means that some more resource (labour, capital, inputs) that could have been used remain idle, unemployed or unused, thus resulting in waste of resources. Under monopolistic competition, price being more than the marginal cost indicates that resources are not being efficiently allocated between productions of different goods. Product differentiation also adds to waste because total product demand is split up among a large number of competiting products so that each firm only produces a small proportion of total market demand. Thus no firm is big enough to reap economies of large scale production. However, on the positive side, product differentiation adds to variety and diversity of products which the consumers value and pay for.
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