Question

what are the welfare implication of monopolizing a perfectly competitive market?

Answer 1

There are three main welfare implications of monopolizing a perfectly competitive market they are reduced consumer surplus, increased producer surplus, and deadweight loss.

Producer surplus: Unlike a firm in the perfect competition a monopoly tries to match its marginal cost with its marginal revenue. This increases the price in the market and increases the producer surplus at the cost of consumer surplus. In the perfect market condition, they both are equal.

Consumer surplus: As we mentioned above, increased price in a monopoly market increases the price of the product and reduce the consumer surplus. The consumer has to pay more and they will buy less as compared to a perfect competition.

Deadweight loss: The firms in a monopoly produces at a point where the full capacity of the firm is not utilized. this lead to a deadweight loss in the market i.e. lack of allocative efficiency which is present in the perfect market condition.

The total market surplus in lesser in a monopoly market when compared to a perfectly competitive market. It gets lost in a deadweight loss and increased producer surplus at the cost of consumer surplus which is the least in the market.