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DeadweightDeadweightWelfare LossWelfare Loss
Maximum total surplus under
perfect competition
Maximum total surplus under
perfect competition
Deadweight welfare lossDeadweight welfare loss
Maximum total surplus under perfect competitionMaximum total surplus under perfect competition
O
£
Q
D = MU
Pe
Qe
MC
B
O
MC
£
Q
D = MU
Pe
Qe
C
A
Maximum total surplus under perfect competitionMaximum total surplus under perfect competition
Deadweightwelfare loss
under monopoly
Deadweightwelfare loss
under monopoly
Deadweight welfare lossDeadweight welfare loss
MC1
Q1
MC
MRAR
A monopolist producing less than the social optimumA monopolist producing less than the social optimum
O
P1
£
Monopoly output
Q
O
P1
MC1
MC = MSC
Q1
MRAR = MSB
Q2
P2 = MSB
= MSC
£
Q
A monopolist producing less than the social optimumA monopolist producing less than the social optimum
Monopoly output Perfectly competitive output
O
£
Q
Ppc
Qpc
AR = D
Consumersurplus
Producersurplus
Deadweight loss under monopolyDeadweight loss under monopolyMC
(= S under perfect competition)
(a) Industry equilibrium under perfect competition(a) Industry equilibrium under perfect competition
a
MRO
£
Q
Ppc
Qpc
AR = D
a
Qpc
Pm
bConsumer
surplus
Producersurplus
Deadweightwelfare loss
Deadweight loss under monopolyDeadweight loss under monopolyMC
(= S under perfect competition)
(b) Industry equilibrium under monopoly(b) Industry equilibrium under monopoly
O
£
Q
Ppc
Qpc
AR = D
Consumersurplus
Producersurplus
Deadweight loss under monopolyDeadweight loss under monopolyMC
(= S under perfect competition)
(a) Industry equilibrium under perfect competition(a) Industry equilibrium under perfect competition
a
Perfectcompetition
MRO
£
Q
Ppc
Qpc
AR = D
a
Qpc
Pm
bConsumer
surplus
Producersurplus
Deadweightwelfare loss
Deadweight loss under monopolyDeadweight loss under monopolyMC
(= S under perfect competition)
(b) Industry equilibrium under monopoly(b) Industry equilibrium under monopoly
Monopoly
Deadweight welfare lossDeadweight welfare loss
Deadweightwelfare loss
from an indirect tax
Deadweightwelfare loss
from an indirect tax
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
Before-taxsituation
O
S
£
Q
D
P1
Q1
Before-taxsituation
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
Consumersurplus
Consumersurplus
O
S
£
Q
D
P1
Q1
Consumersurplus
Consumersurplus
ProducersurplusProducersurplus
Before-taxsituation
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
P2 tax
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
11
22 3344
66
55P2 tax
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
11
22 3344
66
55P2 tax
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
11
22 3344
66
55P2 tax
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
11
22 3344
66
55P2 tax
Tax revenuefor government
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
O
S
£
Q
D
P1
Q1
S + tax
Q2
P2
11
22 3344
66
55P2 tax
Deadweightloss from tax
Deadweight loss from an indirect taxDeadweight loss from an indirect tax
Deadweight welfare lossDeadweight welfare loss
Deadweightwelfare loss
from protection
Deadweightwelfare loss
from protection
The cost of protectionThe cost of protection
O
P
Q
Sdom (=MC)
Q1 Q2
S worldPW
Ddom
O
P
Q
Sdom (=MC)
S world + tariff
S world
a
de
c b
Q1 Q2Q3 Q4
TariffPW + t
PW
Ddom
The cost of protectionThe cost of protection
Area edbc equals lossof consumer surplus
O
P
Q
Sdom (=MC)
S world + tariff
S world
a
de
c b1 2 3 4
Q1 Q2Q3 Q4
TariffPW + t
PW
Ddom
The cost of protectionThe cost of protection
Area 3 equals gainin tariff revenue
Area 1 equals gain inproducer surplus
O
P
Q
Sdom (=MC)
S world + tariff
S world
a
de
c b1 2 3 4
Q1 Q2Q3 Q4
TariffPW + t
PW
Ddom
The cost of protectionThe cost of protection
Areas 2 + 4equals
net loss
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