Answer to Question #209568 in Microeconomics for Jeremy Levu

Question

Consider a monopolized industry. Is the deadweight loss from this industry greater if (1) the government sets price equal to average total cost or (2) the government sets price equal to marginal cost? Why? Use examples of monopoly form your own country to answer this question. 

Answer 1

When the government sets price equal to the average total cost the deadweight loss will be greater compared to when the price set is equal to marginal cost .Because if the goods aren't produced there will be a greater reduction in the quantity exchanged in the market which causes greater dead weight loss. Since monopoly industries have no competition they will become inefficient and less innovative over time which will increase the dead weight loss.