Answer to Question #5152 in Microeconomics for zaarah

Question

Explain the term"dead weight loss" through a comparative between perfect competition and monopoly

Answer 1

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.
For example, consider a market for nails where the cost of each nail is 10 cents and the demand will
decrease linearly from a high demand for free nails to zero demand for nails at
$1.10. In a perfectly competitive market, producers would have to charge a price of 10 cents and every customer whose marginal
benefit exceeds 10 cents would have a nail. However if there is one producer who
has a monopoly on the product, then they will charge whatever price will yield
the greatest profit. For this market, the producer would charge 60 cents and
thus exclude every customer who had less than 60 cents of marginal benefit. The
deadweight loss is then the economic benefit forgone by these customers due to
the monopoly pricing.