CRITICAL LOSS OF SOCIAL WELFARE UNDER MONOPOLY

Nicolae Jula and Bogdan Buneci

No 6, Working papers from Ecological University of Bucharest, Department of Economics

Abstract: If the firm holds a certain market power (Lerner index is positive), then the company's market presence generates a welfare loss. On the one hand, this loss is due to the contraction in demand as a result of practicing a higher price than the competitive price because the higher price discourages some buyers to purchase the product. Welfare loss is given by the reduction of overall satisfaction with the one of the lost consumers. On the other hand, firms can use the resources generated by the monopoly situation to try to obtain legal protection from the government against potential competitors. Rent-seeking means all costs incurred by firms to get the state to promote legislation to create a monopoly or to maintain or strengthen the existing situation. In this paper, we try to calculate the size of the welfare deadweight loss, due of both the monopoly's inefficient resource allocation and rent-seeking activities.

Keywords: market power; welfare loss; Harberger triangle; rent-seeking; Tullock hypothesis; deadweight loss (search for similar items in EconPapers)
JEL-codes: D42 D61 L12 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2013-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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