Download Monopoly-Deadweight Loss

Monopoly & Efficiency
Deadweight Loss Analysis
Allocative Efficiency
• Total Welfare is maximized only when MC = MB for society
– Since MB = Price => only when Price = MC
Costs and
Revenue
B
Monopoly
price
• Allocate efficiency is when P
= MC
Average total cost
A
Demand
Marginal
cost
Marginal revenue
• Any other production point produces deadweight loss
0
– Monopolies are not allocatively efficient (P > MC)
– Competitive firms are (P = MC)
Q
QMAX
Q
Quantity
Inefficiency of Monopoly
Price
Deadweight Loss
Monopoly
price
Allocative Efficiency
P = MC
Marginal
revenue
0
MC
Monopoly Efficient
quantity quantity
Demand
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
Costs and
Revenue
Monopoly Price
Marginal
cost
0
Q
------------------------
------------------------------------PC
---------------------------
Competitive Price
PM
QM
Q
Deadweight
Loss
Average total cost
Demand
Marginal revenue
Quantity
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
Perfect Competition
P > MC
P > min of ATC
Costs and
Revenue
Price
P = MC (always)
P = min of ATC
MC
ATC
(long run)
B
Monopoly
price
Average total cost
A
P1
Demand
Marginal
cost
Marginal revenue
0
Quantity
0
Q
QMAX
Q
Quantity
• Deadweight Loss
• Loss of Consumer Surplus
• Gain of Producer Surplus (from the consumer)
End Result of
Monopoly
Price
MC
Consumer
Surplus
A
PM
$8
Deadweight
Loss
--------------------
Producer
Surplus
MR
0
Monopoly Efficient
quantity quantity
4
6
Demand
Quantity