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Monopoly - MONOPOLY(continued Deadweight Loss of Monopoly A...

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MONOPOLY (continued)
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Deadweight Loss of Monopoly A monopoly firms sets MR=MC despite the fact that P exceeds MC. This profit-maximizing solution creates a welfare loss. Definition The deadweight loss of monopoly is the value of output to consumers minus factor cost between monopoly output where MR=MC and the output where P=MC.
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Figure 8 illustrates deadweight loss. P=24-Q is inverse demand, MR=24-2Q and MC=2Q. Output under monopoly is Q m =6, while output where P=MC is Q c =8. At Q m P=18, MC=12. The gray triangle is the deadweight loss.
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Deadweight Loss of Monopoly
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Taxation and the Deadweight Loss of Monopoly
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Natural Monopoly Natural monopoly is brought about n industries by production processes with increasing returns to scale. One cause of increasing returns is start-up costs. The next figure provides an example, where MC=AC=10 and start-up costs equal 60. This is the case of “L-shaped” costs again. Such a setting contributes to increasing returns—as shown by falling AC. A natural monopoly is an industry in which maximum economic efficiency is obtained when the firm produces and distributes all of the commodity in that industry – that is, when the industry is a pure monopoly.
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Natural Monopoly
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