Generally speaking, excess capacity is considered a negative aspect of production as it leads to wasted investments and lower profitability. However, this is not necessarily always the case and it can also have positive benefits for firms as well as consumers.

Excess capacity in monopolistic competition refers to the ability of a firm to produce more goods and services than it can sell at its optimum output level. This occurs because of a combination of factors including high fixed costs and price inelasticity of demand. In a perfectly competitive market, each firm would have an ideal output point where the demand curve is tangent to the long-run average cost (LAC) curve. This means that no one firm has excess capacity in the long run.

However, this is not possible in a monopolistic market structure due to barriers preventing free entry and exit of new firms. This leaves existing firms with the power to charge higher prices for their products, and this can lead to excess capacity.

In addition, excess capacity can increase the risk of production bottlenecks, and lead to lower overall quality of the product. In these cases, companies may choose to keep the excess capacity as a way of deterring potential competitors from entering the market.

Excess capacity can also have indirect costs for consumers, as it can mean that the company is not investing in research and development for new products. This can lead to a lack of innovation for consumers, and ultimately reduce their buying power.