We study the efficiency properties of a dynamic, stochastic, general equilibrium, macroeconomic modelwith monopolistic competition and firm entry subject to sunk costs, a time-to-build lag, and exogenousrisk of firm destruction. Under inelastic labor supply and linearity of production in labor, the marketeconomy is efficient if and only if symmetric, homothetic preferences are of the C.E.S. form studiedby Dixit and Stiglitz (1977). Otherwise, efficiency is restored by properly designed sales, entry, orasset trade subsidies (or taxes) that induce markup synchronization across time and states, and alignthe consumer surplus and profit destruction effects of firm entry. When labor supply is elastic, heterogeneityin markups across consumption and leisure introduces an additional distortion. Efficiency is then restoredby subsidizing labor at a rate equal to the markup in the market for goods. Our results highlight theimportance of preserving the optimal amount of monopoly profits in economies in which firm entryis costly. Inducing marginal cost pricing restores efficiency only when the required sales subsidiesare financed with the optimal split of lump-sum taxation between households and firms.