Answer to Question #210782 in Microeconomics for Rolin Simo

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. (Max. 1000 words)

Answer 1

If a price set by the government is equal to the average total cost, the deadweight loss is always greater compared to when the established price is equal to the marginal cost, because if the goods are not produced, the number of exchanges will be reduced by more markets. This will result in greater weight loss. Since there is no competition in monopolistic industries, over time, they will become inefficient and lack of innovation, increasing deadweight losses.

loss will be greater when the government sets prices equal to the total average cost.

Similarly, it is based on the idea that monopoly usually maximize the profit in situation where MC = MR and when a price is set where the demand curve is intersected by the line. Usually, Monopoly normally charge high price as it produces lower output, creating society's dead weight loss.

Contrary, if a government is setting a price similar to total average cost, dead weight loss tend to be more. This is based on the fact that monopoly 's lowest charging point on prices covering its costs tends to be less compared to marginal cost.