Question

How does a monopoly create profit out of consumer surplus and deadweight loss?

Answer 1

The monopolist is less efficent than a perfectly competitive firm since it charges a higher price and provide a lower quantity of good as compared to perfect competiton which charges a lower prices and provides a higher output.

The monopoly pricing creates a deadweight loss because the firms forgoe transactions with the consumers. Moreover, charging higher prices results in lower consumer surplus, but higher producer surplus due to the monopoly power. Thus, the monopoly earns greater profits via shifting the consumer surplus to the producer surplus and creating the deadweight loss due to higher pricing strategy.