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marginal cost. Note that monopoly output is always smaller than competitive

output. In the figure, the intersection of MR and MC occurs to the left of the

intersection of D and MC. Thus, we have the following summary comparison

of perfect competition and pure monopoly:

and

Competition delivers output at a minimum price and implies zero industry

profits. Monopoly delivers maximum industry profits by limiting output and

raising price.

Finally, the presence of monopoly represents a major deviation from the

efficiency of perfect competition. In Figure 8.3, the net benefit attained under

perfect competition is measured by the area of the large consumer-surplus tri-

angle ACE. (Producers make zero economic profits because PCAC in the

long run.) By contrast, under pure monopoly, the monopolist raises price,

thereby earning a pure economic profit (rectangle BCDM) but leaving a

smaller triangle of surplus for the consumer (triangle ABM). Thus, under

monopoly, the sum of consumer surplus and producer profit is given by the

trapezoidal area ACDM, which is smaller than the total gains under perfect

competition by the triangle MDE.

The triangle MDE is referred to as the deadweight lossattributed to

monopoly. The economic critique of monopoly is not simply that the firm gains

at the expense of consumers when it elevates price. (In terms of total welfare,

the firm’s profit counts equally with the consumers’ surplus. Indeed, consumers

could well be shareholders of the monopolist and share in the profit directly.)

Rather, the important point is that the monopolist’s elevation of price and

restriction of output cause a reduction in totalwelfare. The reduction in con-

sumer surplus (relative to the competitive outcome) exceeds the excess profit

earned by the monopolist. The deadweight-loss triangle (MDE) measures the

size of the total welfare loss.

Put another way, this deadweight loss would be regained if market output

were increased from QMto QC. For these additional units, consumers’ marginal

benefits exceed suppliers’ marginal costs.Consequently, producing this output

would increase social welfare. As we will see later in this chapter, the common

government response to the so-called case of “natural” monopoly is to regu-

late lower prices and increased output. Similarly, as will be noted in Chapter 11,

the government undertakes a broad spectrum of antitrust initiatives to restrain

or prohibit specific actions and behavior that would lead to monopolization

of markets.

(maximum) MC0.

QMQC

PMPC

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