Question

Which of the following markets will have the largest deadweight loss?

A) A market that consists of a single-price monopoly.

B) A market that consists of perfectly competitive firms.

C) A market that consists of a perfect price discriminating monopoly.

D) None of the above. There is no deadweight loss as long as firms produce at the level of output where marginal revenue equals marginal cost.

Answer 1

Option A.

• A single price monopoly is a market structure characterized by a single firm selling goods and services to all of its customers at a same single price.
• We know that a deadweight loss is said to occur when a firms supply and demand are unable to make the firm reach a point of economic efficiency or in other words a firm is said to have a deadweight loss if it incurs a loss in the economic surplus.
• A single price monopolist is said to have the largest deadweight loss among all as it makes some individuals better-off and others worse-off by charging all the customers with same price for their goods and services. This makes them produce less surplus and hence it looses its efficiency when compared to other markets.