Question

explain and diagrammatically identify the deadweight loss of monooly?

Answer 1

When a market does not produce socially efficient quantity, then the society always experiences a deadweight loss. A monopolist always abuses it's power and maximize profit by producing at the point where MR=MC. Also, in case of monopoly price is set at the point where the profit maximizing output lies on the demand curve. But in case of perfect competition, profit is maximized by producing at the point where price=MC. Perfect competition outcome is socially efficient outcome, whereas monopoly price is greater than (monopoly sets price above MC) perfect competition price but quantity supplied is less than perfect competition output level. This inefficiency caused by monopoly leads to a market failure and the society experiences welfare loss due to monopoly pricing.