Monopoly Efficiency Deadweight Loss Analysis Allocative Efficiency Total

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 Price Deadweight Loss Monopoly price Allocative Efficiency P = MC Marginal revenue 0 MC Monopoly Efficient 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 Monopoly Price QM ------------ PC -------------------------------- Competitive Price PM Deadweight Loss

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

• Deadweight Loss • Loss of Consumer Surplus • Gain of Producer Surplus (from the consumer) End Result of Monopoly A $8 4 6