Answer to Question #25803 in Microeconomics for ANKIT AGRAWAL

Question

Explain the relationship between the deadweight loss under monopolist product market and the Marshallian law of diminishing marginal utility.

Answer 1

The law of diminishing marginal utility is at the heart of the explanation of numerous economic phenomena, including time preference and the value of
goods... The law says, first, that the marginal utility of each homogenous unit
decreases as the supply of units increases (and vice versa); second, that the
marginal utility of a larger-sized unit is greater than the marginal utility of
a smaller-sized unit (and vice versa). The first law denotes the law of
diminishing marginal utility, the second law the law of increasing total
utility.
In economics, a deadweight loss (also known as excess burden or allocative
inefficiency) is a loss of economic efficiency that can occur when equilibrium
for a good or service is not Pareto optimal. In other words, either people who
would have more marginal benefit than marginal cost are not buying the product,
or people who have more marginal cost than marginal benefit are buying the
product.
Causes of deadweight loss can include monopoly pricing (in the case of
artificial scarcity), externalities, taxes or subsidies, and binding price
ceilings or floors (including minimum wages). The term deadweight loss may also
be referred to as the "excess burden" of monopoly or taxation.