Deadweight Loss Analysis

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Presentation transcript:

Deadweight Loss Analysis Monopoly & Efficiency Deadweight Loss Analysis

Monopolies & Elasticity Unit Elastic Ed = 1 Elastic range D MR Inelastic Range ● ----------------- Monopolies will: Operate only in Elastic Portion of Demand Total Revenue at max when Ed = 1

Efficiency Analysis Allocative Efficiency is when P = MC No DWL, socially optimal Monopolies fail as P > MC Competitive Firms always pass P = MC Production Efficiency is when P = Min. of ATC Monopolies fail as P > min of ATC Competitive Firms achieve it in long run Monopoly P > MC (always) Competitive Firm P = MC (always) P > min of ATC P = min of ATC (long run)

Deadweight Loss (DWL) DWL is caused by a monopoly, a tax or subsidy and an effective price floor/ceiling Unless the tax/subsidy is correcting a market failure! No DWL when P = MC (MB = MC) if P > MC => market is too small Example: misplaced tax or monopoly (or price ceiling…) if P < MC => market is too big Example: misplaced subsidy

Inefficiency of Monopoly Price MR D = Market Demand Curve MC DWL P > MC EM Allocative Efficiency P = MC Monopoly price quantity EC Competitive Price Competitive quantity For competitive industry P = D= MR Market demand is MR So @ Ec MR = MC Quantity

Deadweight Loss Analysis Revenue from a tax is transferred from producer/consumer => to Government Revenue from a subsidy is transferred from Gov’t => to producer/consumer Monopoly excess profit is a transfer of consumer surplus => to private firm Excess profit => some consumer surplus turns into monopoly profit Deadweight Loss as P > MC Monopoly Price PM ----------------- --------------------- - Competitive Price PC --------------------------- ------------------------ QM QC

Worksheet Monopoly & Deadweight Loss

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