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Economics explained


Market failure

Deadweight loss under monopoly

Deadweight loss under monopoly

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Assuming an absence of economies of scale, monopoly equilibrium is both

Productively inefficient
Allocatively inefficient

Deadweight loss

A measure of the resulting loss of economic welfare is given by the shaded triangle in the diagram.

This indicates the loss of net consumer and producer surplus due to the monopoly. This is also called the deadweight loss under monopoly. For consumers, the reduction in consumer surplus amounts to a reduction in real income.

Competitive firm

A competitive firm would produce at Q1 and at price P1. This represents the optimum production and consumption position.

Monopoly firm

Under monopoly firms will set price P2 and produce a quantity of Q2. Too few resources are used in the production of this good because the price is too high.

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