deadweight loss

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• A monopoly sets P > MC ⇒ creates a gap between what consumers are willing to pay and what the producer’s cost is ⇒ quantity sold is less than the socially optimal quantity (level of output where the social benefit is equal to the social cost) ⇒ a deadweight loss, which is a loss of economic efficiency that occurs when the equilibrium for a good or a service is not achieved.

the inefficiency of monopoly

• the inefficiency of monopoly
  • monopoly produces < socially efficient quantity of output

example

• Let’s say a monopoly sells a product at $20,whichisaboveitsMCof$10. Consumers are willing to pay up to $15fortheproduct.However,becausethemonopolysetsthepriceat$20, some consumers who value the product at more than $10(theMC)butlessthan$20 will not buy the product. This leads to a deadweight loss because these transactions that would have benefited both the consumer and the producer do not occur.

comparison with tax

• The deadweight loss in a monopoly is similar to the deadweight loss caused by a tax. A tax also creates a gap between what consumers pay and what producers receive, leading to less than the socially optimal quantity being sold.
• The key difference is that in a monopoly, the extra revenue (analogous to the tax) goes to a private firm, whereas in the case of a tax, the revenue goes to the government.