Explain the social cost of monopoly power

social cost of monopoly power. Monopoly creates a social cost, called a deadweight loss, because some consumers who would be willing to pay for the product up to its marginal cost (MC), are not served. In a monopoly, there is no supply curve because monopolists are price setters and not price takers.

demand shifts – will only change price  

  • quantity produced by monopoly still stays the same
  • intersection of MR=MC stays the same

tax effect – increases price by less than tax in a competitive market  

  • in monopoly, price can sometimes rise higher than the tax
  • MC’ = MC + tax
    • basically, the marginal cost shifts up by a constant
  • demand
  • marginal revenue
  • marginal cost
  • marginal cost plus tax
  • p = price before tax
  • p* = price after tax, increased by more than the tax

deadweight loss – occurs along w/ consumer surplus loss w/ change to monopoly  

  • normally in competitive market, price found at intersection of marginal cost and market demand
    • price set higher than this in monopoly >> loss of consumer surplus
    • less quantity produced >> deadweight loss
  • price regulation can get rid of deadweight loss in a monopoly
    • sets price minimum in competitive market, sets price maximum in a monopoly market

social cost of monopoly power. natural monopoly – has a much more efficient production than other firms  

  • makes it unprofitable for other firms to even continue production
  • possible w/ large economies of scale

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