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 means loss of welfare to the consumers. It is the area represents loss of consumer surplus in the market. It happens, when price is high and output is lower, kept by the monopolist.

It is not possible to achieve socially optimal outcome, with perfect price discrimination, because it absorbs all the consumer surplus and consumers have to buy goods at their maximum willingness to pay the price level. Hence, all benefits go to the monopolist and consumers pay the highest possible price, based on their own WTP price.

Consumers prefer perfect competition, because it has a higher output level and lower price level, than that of the monopolist. Further, consumers are the price setter in perfect competition. It makes them prefer perfect competition.