we can observe why the decisions of the monopolist—though perhaps
very profitable for the firm—lead to an inefficient outcome for society as a
whole.
Since price exceeds marginal cost for a monopolist, society as a whole
would benefit if more units of the good were produced—because the
marginal value to society of extra units, as reflected by the price, exceeds
the marginal cost of producing the extra units. In the terminology we
introduced in Chapter 5 , more economic surplus would be generated for
society if the monopolist increased its level of output. The monopolist’s
profit-maximizing decision to restrict output below the competitive level
creates a loss of economic surplus for society—a deadweight loss. In other
words, it leads to market inefficiency.
A monopolist restricts output below the competitive level and thus reduces the amount of
economic surplus generated in the market. The monopolist therefore creates an inefficient
market outcome.