G U R E

Demi-eiCM M»er*lo>w loss

Marcnnl ! reicnuc Jwnwd raw» is that the government gets the revenue from a tax. whereas a private firm gets the monopoly profit.

Thl Monopoly's Profit: A Social Cost?

It is tempting to decry monopolies for "profiteering" at the expense of the pub-lie. And indeed, a monopoly firm dcxis earn a higher profit by virtue of its market power. According to tin.' 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 pk* but merely a bigger slice for producers and a smaller slice for consumers. Unless consumers are for some reason more deserving than producers—a normative judgment about equity that goes beyond the realm of economic efficiency—the monopoly profit is not a social problem.

The problem in a monopolized market arises because the firm produces and sells a quantity of output below the level that maximizes total surplus. The deadweight loss measures how much the economic pie shrinks as a result. This inefficiency is connected to the monopoly's high price: Consumers buy fewer units when the firm raises its price above marginal cost. But keep in mind that the profit earned on the units that continue to be sold is not the problem. The problem stems from the inefficiently low quantity of output. Put differently, if the high monopoly price did not discourage some consumers from buying the good, it would raise producer surplus by exactly the amount it reduced consumer surplus, leaving total surplus the same as could be achieved by a benevolent social planner.

There is, however, a possible exception to this conclusion. Suppose that a monopoly firm lias to incur additional costs to maintain its monopoly position. For example, a firm with a government-created monopoly might need to hire lobbyists to convince lawmakers to continue its monopoly. In this case, the monopoly may use up some of its monopoly profits paying for these additional costs. If so, the social loss from monopoly includes both these costs and the deadweight loss resulting from a price above marginal exist.

QUICK QUIZ Hew doot a rnones-olist'i quantity of cjtpjt co-nparc to the quantity of output that maximize* total »urpiu*? How doei this difference relate to the concept of deadweight lots?

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