Managerial Economics and Strategy, 2/e

9.3 Market Failure Due to Monopoly Pricing

Unlike perfect competition, which achieves economic efficiency—that is, maximizes total surplus, $TS\left(=\text{ consumer surplus}+\text{producer surplus}=CS+PS\right)$ [&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 ...