1. Deadweight Loss Analysis
Monopoly & Efficiency
Deadweight Loss Analysis

2. 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)

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

4. 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

5. 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)

6. 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