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Monopoly & Efficiency

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

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Monopoly & Efficiency

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  1. Monopoly & Efficiency Deadweight Loss Analysis

  2. 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 notallocatively efficient (P > MC) • Competitive firms are (P = MC)

  3. MC Deadweight Loss Allocative Efficiency P = MC Monopoly price Marginal Demand revenue Monopoly Efficient quantity quantity Inefficiency of Monopoly Price Quantity 0

  4. Excess profit from consumer Deadweight Loss 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 Monopoly Price PM ----------------- --------------------- - PC Competitive Price --------------------------- ------------------------ QM

  5. Monopoly Perfect Competition P > MC P > min of ATC P = MC (always) P = min of ATC (long run) Efficiency Analysis • Allocative Efficiency whenP = MC • Monopolies fail as P > MC • Competitive Firms are always Allocative Efficient • Production Efficiency whenP = min. of ATC • Monopolies fail as P > min of ATC • Competitive Firms achieve it in long run

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

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