Deadweight

Welfare Loss
Deadweight welfare loss

Maximum total
surplus under
perfect competition
Maximum total surplus under perfect competition
£

MC

Pe

D = MU

O
Qe Q
Maximum total surplus under perfect competition
£

MC

Pe
B

D = MU
C
O
Qe Q
Deadweight welfare loss

Deadweight
welfare loss
under monopoly
A monopolist producing less than the social optimum
£
MC

P1

MC1
AR
MR
O Q1 Q
Monopoly output
 A monopolist producing less than the social optimum
£
MC = MSC

P1

P2 = MSB
= MSC

MC1
AR = MSB
MR
O Q1 Q2 Q
Monopoly output Perfectly competitive output
 Deadweight loss under monopoly
£ MC
(= S under perfect competition)

Consumer
surplus
a
Ppc
Producer
surplus

AR = D
O Qpc Q
(a) Industry equilibrium under perfect competition
 Deadweight loss under monopoly
£ MC
(= S under perfect competition)

Deadweight
Consumer welfare loss
surplus b
Pm

Ppc Producer a
surplus

MR AR = D
O Qpc Qpc Q
(b) Industry equilibrium under monopoly
 Deadweight loss under monopoly
£ MC
(= S under perfect competition)
Perfect
competition

Consumer
surplus
a
Ppc
Producer
surplus

AR = D
O Qpc Q
(a) Industry equilibrium under perfect competition
 Deadweight loss under monopoly
£ MC
(= S under perfect competition)
Monopoly

Deadweight
Consumer welfare loss
surplus b
Pm

Ppc Producer a
surplus

MR AR = D
O Qpc Qpc Q
(b) Industry equilibrium under monopoly
 Deadweight welfare loss

Deadweight
welfare loss
from an indirect tax
 Deadweight loss from an indirect tax
£

Before-tax
situation S

P1

O Q1 Q
 Deadweight loss from an indirect tax
£

Before-tax
situation S

Consumer
surplus
P1

O Q1 Q
 Deadweight loss from an indirect tax
£

Before-tax
situation S

Consumer
surplus
P1

Producer
surplus
D

O Q1 Q
 Deadweight loss from an indirect tax
£
S + tax

P2

P1

P2 − tax

O Q2 Q1 Q
 Deadweight loss from an indirect tax
£
S + tax

1
P2
2 3
P1
4 5
P2 − tax

6
D

O Q2 Q1 Q
 Deadweight loss from an indirect tax
£
S + tax

1
P2
2 3
P1
4 5
P2 − tax

6
D

O Q2 Q1 Q
 Deadweight loss from an indirect tax
£
S + tax

1
P2
2 3
P1
4 5
P2 − tax

6
D

O Q2 Q1 Q
 Deadweight loss from an indirect tax
£
S + tax
Tax revenue
for government
S

1
P2
2 3
P1
4 5
P2 − tax

6
D

O Q2 Q1 Q
 Deadweight loss from an indirect tax
£
S + tax
Deadweight
loss from tax
S

1
P2
2 3
P1
4 5
P2 − tax

6
D

O Q2 Q1 Q
Deadweight welfare loss

Deadweight
welfare loss
from protection
 The cost of protection
P
Sdom (=MC)

PW S world

Ddom
O Q1 Q2 Q
 The cost of protection
P
Area edbc equals loss Sdom (=MC)
a
of consumer surplus

PW + t e d
S world + tariff
Tariff c b
PW S world

Ddom
O Q1 Q3 Q4 Q2 Q
 The cost of protection
P
Sdom (=MC)
a Area 1 equals gain in
producer surplus

Area 3 equals gain

in tariff revenue

PW + t e d
S world + tariff
Tariff c 1 2 3 4 b
PW S world

Ddom
O Q1 Q3 Q4 Q2 Q
 The cost of protection
P
Sdom (=MC)
a Areas 2 + 4
equals
net loss

PW + t e d
S world + tariff
Tariff c 1 2 3 4 b
PW S world

Ddom
O Q1 Q3 Q4 Q2 Q