Lecture Notes: Why Monopolies Cause Deadweight Welfare Loss

Key Concepts

• Deadweight Welfare Loss: Refers to the loss in society's surplus, which is the combined surplus of consumers and producers.
• Monopoly and Society's Surplus: Monopolies reduce the total level of society's surplus compared to competitive outcomes.

Diagram Explanation

• Monopoly Diagram: Includes marginal cost and two revenue curves, excluding the average cost curve.
  • Marginal Cost Curve = Supply

Comparing Outcomes

Competitive vs Monopoly Outcomes

• Consumer Surplus

  • Competitive: Area A + B + C
    • The area above the price line and below the demand curve.
  • Monopoly: Area A
    • Loss of consumer surplus is B and C.

• Producer Surplus

  • Competitive: Area D + E
    • The area beneath the price line but above the supply curve (marginal cost curve).
  • Monopoly: Area B + D
    • Area beneath the price line but above the supply curve, within the quantity confines.

Society’s Surplus

• Competitive Outcomes: A + B + C + D + E
  • Total area represents society surplus.
• Monopoly Outcomes: A + B + D
  • Recovered: B (moved to producer surplus from consumer surplus)
  • Deadweight Losses: Area C and E (non-recovered losses)
    • C: Deadweight loss of consumer surplus.
    • E: Deadweight loss of producer surplus.

Implications of Monopoly

• Reduction in Society Surplus
  • Monopolies cause society's surplus to decrease significantly.
• Impact on Consumers
  • Major loss in consumer surplus; consumers exploited by higher prices.
• Monopoly as Market Failure
  • Monopolists contribute to market failure due to their impact on society's surplus.

Conclusion

Monopolies are detrimental to societal welfare, primarily due to the significant loss in consumer surplus and the reduction in total society surplus. Understanding this concept is crucial for identifying market failures and the economic impact of monopolies.