Question

Graphically show deadweight welfare loss due to monopolies and explain its exact meaning. Explain how can I see or feel this deadweight welfare loss?  i.e. its physical/economic impact?

Answer 1

The monopoly market is characterized by the dead weight loss because at the profit maximizing level the monopoly charges a very high price and produces limited quantity. The dead weight loss is a social welfare loss and it occurs because the monopoly is not producing the socially efficient quantity. The monopoly sets a price that is higher than the marginal cost of the production so the weaker sections of the society wont be able afford the good or service.

Dead weight loss MC Price ATC MR - x Quantity

The monopoly market is characterized by one seller and he dominates the market , so when he decided to higher price for his good you have no options left, but to consumer at a higher price or not. If you do not consume the good due to your limited income you standard of living will fall and that is a welfare loss. The welfare loss can be greater in the case of basic services or goods.