Illustrate the Deadweight loss under monopoly. Does it exist in case of Perfect competition as well?
Hello Simran !
I'm assuming that you know what monopoly firm is (when only one company is producing a product ) , so Dead weight loss incur whenever a perfectly competitive industry reorganizes itself as monopoly which led to loss to society.
Understand this by an example , suppose the perfectly competitive industry produces quantity Q1 and sells the output at price P1. The monopolist restricts output to Q2 (Q2<Q1) and raises the price to P2(P2>P1).
Now , if a perfectly competitive industry is switching to monopoly then It is also transfers a portion of the consumer surplus earned in the competitive case to the monopoly firm. So , it leads to a loss.
No , it does not exist in Perfect Competition as Deadweight loss is the result of a market that is unable to naturally clear, and is an indication, therefore, of market inefficiency.
Hope it helps !
