ECON 201 Lecture 3: The Welfare Cost of Monopolies
10 Mar 2017
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Because a monopoly leads to an allocation of resources different from that in a competitive market, the outcome must, in some way, fail to maximize total economic well-being. Below this quantity, the value of an extra unit to consumers exceeds the cost of providing it, so increasing output would raise total surplus. Above this quantity, the cost of producing an extra unit exceeds the value of that unit to consumers, so decreasing output would raise total surplus. At the optimal quantity, the value of an extra unit to consumers exactly equals the marginal cost of production. The monopolist produces less than the socially efficient quantity of output. Because the market demand curve describes a negative relationship between the price and quantity of the good, a quantity that is inefficiently low is equivalent to a price that is inefficiently high. Monopoly pricing prevents some mutually beneficial trades from taking place.
