Hi everybody, something else that you need to know in your course is why monopolies cause a deadweight welfare loss. Remember, the word deadweight means not recovered, and by welfare we mean society surplus, the sum of consumer and producer surplus. surplus.
So there is a deadweight welfare loss. It means compared to competitive outcomes, monopolies are reducing the total level of society's surplus. And we are going to prove that in this video on this diagram here. What I've drawn on the right hand...
hand side is a basic monopoly diagram without an average cost curve. So just the marginal cost and the two revenue curves. For the sake of this diagram, you need to be aware that the marginal cost curve is equal to supply.
What we're now going to look at is comparing the level of consumer and producer surplus at competitive outcomes compared to monopoly outcomes. PM and QM is a monopolist price and quantity taken from the profit maximization point, whereas PCM is a monopolist price and quantity taken from the profit maximization point. and QC is a competitive firm's pricing quantity taken at the allocatively efficient level of production. Right, let's now compare consumer surplus at competitive outcomes compared to monopoly outcomes. Well, consumer surplus at competitive outcomes is a competitive consumer surplus at competitive outcomes is the triangle A plus B plus C.
So it's that entire area here, down that triangle, the area above the price line and below the demand curve. At monopoly, with a higher price, the consumer surplus is now only A. So there is a loss of consumer surplus of B and C. What about producer surplus?
Producer surplus is the area beneath the price line but above the supply curve. curve. So our competitive outcomes, PC and QC, the area of producer surface is D plus E, the area beneath the price line but above the supply curve, the marginal cost curve in this case.
What about with monopoly outcomes? So PM and QM, what happens to producer surface? Well, we have to bear in mind the confines of the quantity that the monopolist is producing. So what we need to look for is the area above the supply curve beneath the price line. the price, but within the quantity that's being produced.
So if I actually do that in terms of an area, that will give us this area. So the area beneath the price line, but above the supply curve. Crucially though, within the confines of the quantity being produced by the monopolist.
And that gives us a producer circus, which is now B plus D. Okay, so now we want to compare society's surplus, society surplus, at competitive outcomes compared to society surplus and monopoly outcomes, where society surplus is the sum of consumer and producer surplus. Well, at competitive outcomes, consumer surplus versus producer surplus was area A plus B plus C plus D plus E.
So this entire area represented society surplus. What about at monopoly outcomes? outcomes now. Well, let's add up our consumer surplus and our producer surplus and monopoly outcomes, and we get A plus B plus D.
A plus B plus D. Even though B was being lost in consumer surplus, it's come back in terms of producer surplus. So B is not a deadweight loss at all.
It's been recovered. Aries C and E, though, clearly have not been recovered at all. C used to be a an area of consumer surplus under competitive outcomes. E used to be an area of producer surplus under competitive outcomes.
So areas C and E have been lost, gone forever, non-recovered losses of welfare, as clearly seen here when we look at society surplus. So what we can do is we can label C as a deadweight welfare loss of consumer surplus, and E represents a deadweight welfare loss of producer surplus. And this is why monopolies are so bad for society. They reduce the total level of society surplus. We're not too concerned about the loss of producer surplus, because producers are gaining significantly with higher monopoly profit.
The biggest concern here is a huge loss of consumer surplus, consumers being exploited drastically via higher levels of pricing that monopolies charge. But that explains why monopolies cause a deadweight welfare loss to society. society and why you can also argue that monopolists are a serious cause of market failure out there.
Hopefully that makes sense now and if you had to explain that in an essay you can do. Thank you so much for watching guys. I'll see you all in the next video.