Question

Use what you know about consumer surplus and “willingness to pay” to explain why monopolies create a deadweight loss

Answer 1

Consumer surplus is the area below demand curve and above market price. It is the difference between what consumers are willing to pay and what they actually pay.

In monopoly, the total consumer surplus is reduced that is why there is a deadweight loss. A monopolist can only sell goods, if he reduces the price. So the price of the good is always less than MR. The price in monopoly is above the marginal cost.

To be efficient, the quantity to be produced should be at the intersection of demand curve and marginal cost curve. But in a monopoly the profit maximizing output is at the intersection of MR and MC and extended to the demand curve so the quantity produced in monopoly is less than optimal. This is the deadweight loss.