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Monopoly & Efficiency

Understanding the impact of monopolies on efficiency, deadweight loss, and allocative efficiency. Learn how monopolies differ from competitive firms in pricing and output level decisions, leading to potential inefficiencies and welfare losses.

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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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