Question

Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from taxation?

Answer 1

Ans) Monopoly is when there is single seller selling unique product. A monopoly charges more price and produces less quantity than socially optimal. This results in deadweightloss.

When government imposes tax, price paid by buyers increases (like monopoly charges higher price) and quantity produced reduces (like monopoly produces less quantity socially optimal. However, in tax, quantity produced becomes equal to socially optimal quantity if there exists negative externality.).