Question

With the aid of a diagram, show the deadweight cost of a monopoly. Explain

the policy implications for government.

Answer 1

Here, $D$ is the demand curve, $S_1$ is the supply curve (in case of competitive market), $S_2$ is the supply curve (in case of monopoly). The shaded area in the diagram is the deadweight loss (or the deadweight cost) of the monopoly. In order to remove the deadweight cost, the government can apply the price ceiling. If there is a binding price floor closed to equilibrium price at competitive market, it will remove the deadweight cost and bring the market to a competitive equilibrium.