Figure 12-7 The Deadweight Loss of Monopoly
follows that the lower monopoly output must result in a smaller total of
consumer and producer surplus.
The monopoly equilibrium is not the outcome of a voluntary agreement
between the one producer and the many consumers. Instead, it is
imposed by the monopolist by virtue of the power it has over the market.
When the monopolist chooses an output below the competitive level,
market price is higher than it would be under perfect competition. As a
result, consumer surplus is diminished, and producer surplus is increased.
In this way, the monopolist gains at the expense of consumers. This is not
the whole story, however.
When output is below the competitive level, there is always a net loss
total surplus: More surplus is lost by consumers than is gained by the
monopolist. Some surplus is lost because output between the
monopolistic and the competitive levels is not produced. This loss of
surplus is called the deadweight loss of monopoly. It is illustrated in Figure
12-7.