Question

In: Economics

A loss in social welfare is caused because a monopoly market produces a smaller output than...

A loss in social welfare is caused because a monopoly market produces a smaller output than that of a perfectly competitive market. A monopolist produces too little output at a higher price.

This concept of “underproduction” has been the topic of many research studies, concluding that if markets would deviate from a perfectly competitive market structure, it may cause a lack of economic efficiency.

Research the term monopoly underproduction and:

Summarize the reasons behind such a claim.
In your research, explain “the deadweight loss” concept.

Provide specific examples to help support your discussion.

Expert Solution

Monopoly underproduction means that a monopoly firm produces below the ideal (i.e. efficient) output.

Monopoly profit maximizing condition is MR=MC and monopoly demand curve (i.e. AR curve) is downward sloping and we know when AR falls MR falls more than AR and hence lies below it.

Perfect competition condition is P=MC at the point the economy produces efficient output as nothing is left unsold. Each consumer gets what he/she wants at the price they are willing to pay. So there is no deadweight loss in case of perfect competition because economy is producing ideal output.

In monopoly the prices are high and output is low whereas in perfect competition prices are low and output is high as compared to monopoly.

We can explain it with the help of diagram under different cases where MC is constant, a straight line and non- linear.

Case where MC is constant

We see when economy moves from perfect competition to monopoly the consumer is worse off as there is loss of surplus of (-c-d-e) whereas producer is better off there is addition to producer surplus of (c+d) when we add both of them we get (-e) which indicate dead weight loss which means this much amount of output is lost which was initially in use in case of perfect competition.

DWL= Area of triangle shaded=(1/2)(P_m-P_c) (Q_c-Q_m)

Case where MC is straight line

We see when economy moves from perfect competition to monopoly the consumer is worse off as there is loss of surplus of (-c-d-e) whereas producer may be better off or worse off depending on elasticity of price. There is addition to producer surplus of (c+d-h) when we add both of them we get ( -e-h) which indicate dead weight loss which means this much amount of output is lost which was initially in use in case of perfect competition

DWL= Area of triangle shaded=(1/2)(P_m-MC_m) (Q_c-Q_m)

Case where MC is non-linear

We see when economy moves from perfect competition to monopoly the consumer is worse off as there is loss of surplus of (-c-d-e) whereas producer may be better off or worse off depending on elasticity of price. There is addition to producer surplus of (c+d-h) when we add both of them we get ( -e-h) which indicate dead weight loss which means this much amount of output is lost which was initially in use in case of perfect competition .

DWL = Area of triangle shaded= ^Qc_Qm∫(equation of demand curve – equation of MC)dQ

This shows market inefficiency which was not in case of perfect competition.

Rahul Sunny answered 2 years ago

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