Question

Why is the deadweight loss from monopolistic competition less than the deadweight loss from a monopoly?

Answer 1

The monopoly pricing creates a dead weight loss because the firm forgoes transactions with the consumers. Monopolies can become inefficient and less innovative over time because they do not have to compete with other producers in a marketplace. In the case of monopolies, abuse of power can lead to market failure.

Suppliers in monopolistically competitive firms will produce below their capacity. Because monopolistic firms set prices higher than marginal costs, consumer surplus is significantly less than it would be in a perfectly competitive market. This leads to dead weight loss and an overall decrease in economic surplus. but this is still very less than dead weight loss in monopoly because there he has the entire power of the market. he is the sole seller.

in monopolistic, the dead weight loss is due to loss of output as compared to perfect competition. in monopoly the price is also higher and the quantity is also sharply decreased in comparison to perfect competition.

therefore, dead weight loss from monopolistic competition less than the dead weight loss from a monopoly.

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