Question

1. 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

A dead weight loss is the allocative inefficiency of an economy. When the monopolist does not produce enough as much as it should have, it results in the resources not being fully utilized for better production. When there is price discrimination then the resources put in by the monopolist is given to the consumers based on their purchasing power and demand. Hence possibilities arise of socially optimal outcome being achived. In terms of consumer preference, the perfect competition is better as it gives the consumer fairness. Though in the price discrimination, one set of consumers benefit, it is not the same for all.