Monopoly & Efficiency Deadweight Loss Analysis. Allocative Efficiency Total Welfare is maximized only when MC = MB for society –Since MB = Price => only.

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Presentation transcript:

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 Quantity 0 Price Deadweight Loss Demand Marginal revenue MC Efficient quantity Monopoly price Monopoly quantity Allocative Efficiency P = MC

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 PMPM PCPC Excess profit from consumer QMQM Deadweight Loss Monopoly Price Competitive Price

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

Deadweight Loss Loss of Consumer Surplus Gain of Producer Surplus (from the consumer) End Result of Monopoly $8 46 A