Question

A monopolist produces less than the socially optimal amount, resulting in a “deadweight” loss for the society. Provide an intuitive explanation for the deadweight loss (i.e., what does it represent). Is it possible to achieve the socially optimal outcome if a monopolist is able to implement perfect price discrimination? Do the consumers prefer perfect price discrimination by a monopolist or perfect competition?

Answer 1

Deadweight loss or economic inefficiency under monopoly represents the economic gain foregone because the competitive market equilibrium is not achieved. Under perfect competition the prices are lower and the quantity is higher as compared to the monopoly. So the Deadweight loss is the potential gain or surplus that did not go to the producer or the consumer.

Yes, Perfectly discriminating monopolist produces at socially optimal level. As the monopolist charges the consumers their maximum willingness to pay.

No the consumers do not prefer perfectly discriminating monopolist over perfect competition because producer surplus under perfectly discriminating monopolist is zero. But there is possibility of positive consumer surplus under perfect competition.