True or false.Can dead weight loss of a monopoly be lower than social cost of monopoly?
True. The deadweight loss of a monopoly can indeed be lower than the social cost of monopoly. To understand why, let's break down the concepts.
1. Deadweight Loss: Deadweight loss refers to the loss of economic efficiency that occurs when the allocation of goods and services by a market is not at the socially optimal level. In the case of a monopoly, deadweight loss occurs because the monopolist restricts output and charges a higher price than would prevail under perfect competition, leading to a reduction in consumer surplus and producer surplus.
2. Social Cost: Social cost refers to the total cost incurred by society as a result of a particular economic activity or decision, taking into account both private costs and externalities (i.e., the costs imposed on others). In the context of a monopoly, social cost includes not just the inefficiency caused by deadweight loss, but also any negative externalities associated with the monopolist's behavior.
Now, it is possible for the deadweight loss of a monopoly to be lower than the social cost of monopoly. This can occur if the negative externalities associated with the monopolist's actions are very high compared to the deadweight loss. In such cases, the harm caused by the monopoly's behavior to society as a whole (including external costs) outweighs the loss of efficiency resulting from deadweight loss.
However, it is more common for the deadweight loss of a monopoly to be higher than the social cost of monopoly. This is because the inefficiencies created by restricted output and higher prices under monopoly tend to outweigh the external costs in many situations.