1. Working an example of Market Power Generated Deadweight Loss Market Power that changes equilibrium can lead to the generation of Deadweight Loss that persists as long as the Market Power persists and is often the target for government intervention in the market. The social loss is the difference between the overcompensation and the lost revenue. In other words if the market overcompensates the factor by less than the potential revenue loss, there is a net transfer from the market over its ultimate potential. If there is an overcompensation by more than the potential revenue loss there may not be any social loss at all as the overcompensated factor will spend the “windfall” income in other markets and the net social impact depends on whether the good that is not produced is able to be substituted out of the standard production requirement of the society. In other words overcompensation can indeed increase eventual welfare for everyone. In an economy where demand is given by Pd=100-Q and unrestricted supply is given by Ps1=20+Q but Market Power forces a supply given by PS2=20+3Q, what is the best political action to take?

2. Analytics of Market Power Social Policy Analysis of Market Power Price Quantity 100 20 80 60 40 20 Market Demand Pd=100-Q No Market Power PS1=20+Q With Market Power PS2=20+3Q

3. Policy Evaluation The analysis indicates that when there is no market power we have PD=PS1=>100-Q=20+Q or 2Q=80 and Q=40. With Market Power we have PD=PS2=>100-Q=20+3Q=> 80=4Q and Q=20. The analysis indicates that because of the existence of market power the price is now 100- 20=20+3(20)=80 while it would have otherwise been 100-40=20+40=60. The result is that overcompensation is (80-60)*20=400 and the lost revenue to the market is (40-20)*60=1200. Therefore in this market the overcompensation is 400 and the lost revenue is 1200. Thus there is an apparent requirement for intervention because the revenue that is potentially available $1200 and therefore also requiring the use of more factor inputs can be returned by manipulating the market to reduce the overcompensation by only $400. There is a benefit of 3:1 for government action.