9.3 Market Failure Due to Monopoly Pricing

Unlike perfect competition, which achieves economic efficiency—that is, maximizes total surplus, TS ( = consumer surplus+producer surplus=CS+PS ) [&TS (|eq| ~rom~consumer surplus|+|producer surplus|=|~normal~CS|+|PS)~norm~&]—a profit-maximizing monopoly is economically inefficient because it wastes potential surplus, resulting in a deadweight loss. The inefficiency of monopoly pricing is an example of a market failure: a non-optimal allocation of goods and services such that a market does not achieve economic efficiency. Market failure often occurs because the price differs from the marginal cost, as with a monopoly. This economic inefficiency creates a rationale for governments to intervene, which ...

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