marginal cost some potential consumers value the good at more than its marginal

Marginal cost some potential consumers value the good

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marginal cost, some potential consumers value the good at more than its marginal cost but less than the monopolist's price. These consumers do not buy the good. Because the value these consumers place on the good is greater than the cost of providing it to them, this result is inefficient. Thus, monopoly pricing prevents some mutually beneficial trades from taking place. The inefficiency of monopoly can be measured with a deadweight loss triangle, as illustrated in Figure 8. Because the demand curve reflects the value to consumers and the marginal-cost curve reflects the costs to the monopoly producer, the area of the deadweight loss triangle between the demand curve and the marginal-cost curve equals the total surplus lost because of monopoly pricing. It is the reduction in economic well-being that results from the monopoly's use of its market power. Figure 8The Inefficiency of Monopoly Because a monopoly charges a price above marginal cost, not all consumers who value the good at more than its cost buy it. Thus, the quantity produced and sold by a monopoly is below the socially efficient level. The deadweight loss is represented by the area of the triangle between the demand curve (which reflects the value of the good to consumers) and the marginal-cost curve (which reflects the costs of the monopoly producer). The deadweight loss caused by monopoly is similar to the deadweight loss caused by a tax. Indeed, a monopolist is like a private tax collector. As we saw in Chapter 8, a tax on a good places a wedge between consumers' willingness to pay (as reflected by the demand curve) and producers' costs (as reflected by the
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supply curve). Because a monopoly exerts its market power by charging a price above marginal cost, it creates a similar wedge. In both cases, the wedge causes the quantity sold to fall short of the social optimum. The difference between the two cases is that the government gets the revenue from a tax, whereas a private firm gets the monopoly profit. 15-3B The Monopoly's Profit: A Social Cost? It is tempting to decry monopolies for “profiteering” at the expense of the public. And indeed, a monopoly firm does earn a higher profit by virtue of its market power. According to the economic analysis of monopoly, however, the firm's profit is not in itself necessarily a problem for society. Welfare in a monopolized market, like all markets, includes the welfare of both consumers and producers. Whenever a consumer pays an extra dollar to a producer because of a monopoly price, the consumer is worse off by a dollar, and the producer is better off by the same amount. This transfer from the consumers of the good to the owners of the monopoly does not affect the market's total surplus—the sum of consumer and producer surplus. In other words, the monopoly profit itself represents not a reduction in the size of the economic pie but merely a bigger slice for producers and a smaller slice for consumers. Unless consumers are for some reason
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