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Illustrate the Deadweight loss under monopoly. Does it exist in case of Perfect competition as well?


Simran Rao 11th Mar, 2020
Answer (1)
Megha 2nd Apr, 2020

Hello Simran !

I'm assuming that you know what monopoly firm is (when only one company is producing a product ) , so Dead weight loss incur whenever a perfectly competitive industry reorganizes itself as monopoly which led to loss to society.

Understand this by an example , suppose the perfectly competitive industry produces quantity Q1 and sells the output at price P1. The monopolist restricts output to Q2 (Q2<Q1) and raises the price to P2(P2>P1).

Now , if a perfectly competitive industry  is switching to monopoly then It is also transfers a portion of the consumer surplus earned in the competitive case to the monopoly firm. So , it leads to a loss.

No , it does not exist in Perfect Competition as Deadweight loss is the result of a market that is unable to naturally clear, and is an indication, therefore, of market inefficiency.

Hope it helps !


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