Deadweight Loss Analysis Monopoly & Efficiency Deadweight Loss Analysis

Allocative Efficiency Total Welfare is maximized only when MC = MB for society Since MB = Price => only when Price = MC Allocate efficiency is when P = MC Any other production point produces deadweight loss Monopolies are not allocatively efficient (P > MC) Competitive firms are (P = MC)

Inefficiency of Monopoly Price Marginal revenue Demand Deadweight Loss MC Monopoly price quantity Allocative Efficiency P = MC Efficient quantity Quantity

DWL: Monopoly vs. Taxes Deadweight loss is caused by both a monopoly & a tax Differences: Revenue from a tax is transferred from producer/consumer to the Government Monopoly excess profit is transferred from consumer to a private firm Excess profit from consumer Deadweight Loss Monopoly Price PM ----------------- --------------------- - Competitive Price PC --------------------------- ------------------------ QM

Efficiency Analysis Allocative Efficiency when P = MC Monopolies fail as P > MC Competitive Firms are always Allocative Efficient Production Efficiency when P = min. of ATC Monopolies fail as P > min of ATC Competitive Firms achieve it in long run Monopoly P > MC P > min of ATC Perfect Competition P = MC (always) P = min of ATC (long run)

Loss of Consumer Surplus Gain of Producer Surplus (from the consumer) Deadweight Loss Loss of Consumer Surplus Gain of Producer Surplus (from the consumer) End Result of Monopoly A $8 4 6