Deadweight Loss of Welfare Short Answers

What is meant by a deadweight loss?

A deadweight loss is the loss in producer and consumer surplus due to an inefficient level of production perhaps resulting from one or more market failures or government failure.

Explain why the long run equilibrium in monopoly is likely to lead to a deadweight loss of economic welfare.

• A profit-maximising monopoly will produce an output where marginal revenue = marginal cost
• This price will be higher and the output will be lower than under competitive conditions
• Higher prices cause some consumer surplus to become producer surplus (i.e. abnormal monopoly profit)
• But because output is below the competitive equilibrium, there will be a deadweight loss of welfare, also known as the social cost of monopoly.