Monopoly & Efficiency Deadweight Loss Analysis. Efficiency Analysis Allocative Efficiency is when P = MC –No DWL, socially optimal –Monopolies fail as.

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Presentation transcript:

Monopoly & Efficiency Deadweight Loss Analysis

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 only in long run Perfect Competition P = MC (always) P = min of ATC (long run) Monopoly P > MC P > min of ATC

Deadweight Loss Deadweight loss is caused by a monopoly, a tax and a subsidy –Unless the tax or subsidy is correcting a market failure! There is never a deadweight loss when P = MC (MB = MC) –If P > MC => market is too small Example: misplaced tax or monopoly –If P market is too big Example: misplaced subsidy

Allocative Efficiency Quantity 0 Price Demand ( marginal benefit: value to buyers) Marginal cost Value to buyers is greater than cost to seller. Value to buyers is less than cost to seller. Cost to monopolist Value to buyers Efficient Quantity MC = MB Welfare is Maximized! MC = MB

Identical Market Demand Curve The market demand curve for a good/service is exactly the same whether an industry is a monopoly or a competitive industry. Therefore the market demand curve below for T-Shirts could be for a monopoly or a competitive industry Market 1 Firm In a competitive industry market demand = MR Monopoly: market demand > MR

Inefficiency of Monopoly Quantity 0 Price DWL P > MC D = Market Demand Curve MR MC Competitive quantity Monopoly price Monopoly quantity Allocative Efficiency P = MC EMEM ECEC Competitive Price For competitive industry P = D= MR Market demand is MR Ec MR = MC

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 PMPM PCPC Excess profit => some consumer surplus turns into monopoly profit QMQM Deadweight Loss as P > MC Monopoly Price Competitive Price QCQC

Worksheet Monopoly & Deadweight Loss