Principles of Economics- Mankiw (5th) 318

Principles of Economics- Mankiw (5th) 318 - 328 PA R T F I...

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328 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY THE DEADWEIGHT LOSS We begin by considering what the monopoly firm would do if it were run by a benevolent social planner. The social planner cares not only about the profit earned by the firm’s owners but also about the benefits received by the firm’s con- sumers. The planner tries to maximize total surplus, which equals producer sur- plus (profit) plus consumer surplus. Keep in mind that total surplus equals the value of the good to consumers minus the costs of making the good incurred by the monopoly producer. Figure 15-7 analyzes what level of output a benevolent social planner would choose. The demand curve reflects the value of the good to consumers, as mea- sured by their willingness to pay for it. The marginal-cost curve reflects the costs of the monopolist. Thus, the socially efficient quantity is found where the demand curve and the marginal-cost curve intersect. Below this quantity, the value to consumers ex- ceeds the marginal cost of providing the good, so increasing output would raise to-
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