The Social cost of Monopoly

Here we will compare the profit-maximizing price of a monopolist to the perfectly competitive price and analyzes the impact of monopoly on total surplus.

Comparison of Prices

• In a perfectly competitive market, the price is determined by the intersection of the marginal cost curve and the demand curve.

• In a monopoly market, the profit-maximizing quantity is given by the intersection of the marginal cost curve and the marginal revenue curve.

• The profit-maximizing price of a monopolist is higher than the price in a perfectly competitive market, while the quantity sold is smaller.

Consumer and Producer Surplus

• In a monopoly market, consumer surplus is the area below the inverse demand curve and above the monopoly price. Producer surplus is the area below the monopoly price and above the supply curve.

• In a perfectly competitive market, consumer surplus is larger, and producer surplus is smaller compared to a monopoly market.

Deadweight Loss

• The total surplus decreases in a monopoly market.

• The deadweight loss, or social cost of monopoly, is the reduction in total surplus due to the monopoly.

• Monopolies lead to a transfer of surplus from consumers to producers and a deadweight loss, indicating inefficiency.

Exercise: SpaceX Example

• Revisits the SpaceX example to calculate the deadweight loss of a monopoly.

• Calculates the profit-maximizing quantity and price for SpaceX as a monopoly.

• Determines the quantity and price if the market were perfectly competitive.

• Calculates the deadweight loss due to the monopoly, representing the surplus lost because of the monopoly.

Key Takeaways

• Monopoly price is higher, and quantity is lower than in a perfectly competitive market.

• Monopolies lead to reduced consumer surplus and a deadweight loss.