Why does a monopoly cause a deadweight loss?
Understand the Problem
The question is asking for an explanation of why monopolies result in a deadweight loss in an economic context. It entails understanding how monopolies affect supply, demand, and overall market efficiency, leading to inefficiencies in resource allocation.
Answer
Monopolies create deadweight loss by producing less and charging higher prices than competitive markets.
A monopoly causes deadweight loss by producing less and charging higher prices compared to a competitive market, leading to a reduction in both consumer and producer surplus and overall economic inefficiency.
Answer for screen readers
A monopoly causes deadweight loss by producing less and charging higher prices compared to a competitive market, leading to a reduction in both consumer and producer surplus and overall economic inefficiency.
More Information
Deadweight loss is an economic inefficiency caused by the monopoly's restriction of output and increase in price, preventing some mutually beneficial trades between consumers and producers.
Tips
A common mistake is assuming that monopolies always maximize social welfare; in reality, they optimize only their own profit.
Sources
- How does monopoly create deadweight loss? - quora.com
- Why does a monopoly cause a deadweight loss? - chegg.com
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