Resource Allocation Under Monopoly
Resource Allocation under Monopoly
The existence of monopoly will lead to a misallocation of resources from the perspective of the economy as a whole. Assume a monopolist with a horizontal MC = AC curve. The monopolist’s P and Q would be at A, while the perfectly competitive P and Q would be at B. The monopoly restricts Q from QC back to Q* with a price of P*. Thus, this good is under-produced, compared to the perfectly competitive market, while other goods are over-produced due to resources (inputs) being transferred to other industries.
P $
P*
A
Obviously, many people would like to buy the product at prices between P* and MC. These trades would be Pareto superior changes. They will not occur under monopoly. Perfect price discrimination would eliminate the deadweight loss of the monopoly because all consumer surplus is transferred to the monopolist; none is lost. The transfer may be viewed as undesirable by society, but resources are still allocated efficiently (P = MC).
Lost consumer Transfer to surplus monopolist Deadweight B MC(=AC) loss PC C Value of inputs D released MR 0 Q* QC Q Q
The firm releases inputs valued at CBQCQ* for use in other industries. The loss in consumer surplus is P*ABPC. Part of this loss was transferred to the monopolist as producer surplus (P*ACPC). Is this transfer desirable? The remainder of the lost consumer surplus (area ABC) is a deadweight loss in that it is lost to consumers, but no one gets it. It is truly lost and is the principal problem for society as a result of monopoly.
The existence of monopoly will lead to a misallocation of resources from the perspective of the economy as a whole. Assume a monopolist with a horizontal MC = AC curve. The monopolist’s P and Q would be at A, while the perfectly competitive P and Q would be at B. The monopoly restricts Q from QC back to Q* with a price of P*. Thus, this good is under-produced, compared to the perfectly competitive market, while other goods are over-produced due to resources (inputs) being transferred to other industries.
P $
P*
A
Obviously, many people would like to buy the product at prices between P* and MC. These trades would be Pareto superior changes. They will not occur under monopoly. Perfect price discrimination would eliminate the deadweight loss of the monopoly because all consumer surplus is transferred to the monopolist; none is lost. The transfer may be viewed as undesirable by society, but resources are still allocated efficiently (P = MC).
Lost consumer Transfer to surplus monopolist Deadweight B MC(=AC) loss PC C Value of inputs D released MR 0 Q* QC Q Q
The firm releases inputs valued at CBQCQ* for use in other industries. The loss in consumer surplus is P*ABPC. Part of this loss was transferred to the monopolist as producer surplus (P*ACPC). Is this transfer desirable? The remainder of the lost consumer surplus (area ABC) is a deadweight loss in that it is lost to consumers, but no one gets it. It is truly lost and is the principal problem for society as a result of monopoly.