Monopoly and Equity The monopoly solution raises issues not just of efficiency but also of equity Figure 10.11 "Perfect Competition, Monopoly, and Efficiency" shows that the monopolist charges price Pm rather than the competitive price Pc; the higher price charged by the monopoly firm reduces consumer surplus Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay It is measured by the area under the demand curve and above the price of the good over the range of output produced If the industry were competitive, consumer surplus would be the area below the demand curve and above PcC With monopoly, consumer surplus would be the area below the demand curve and above PmR Part of the reduction in consumer surplus is the area under the demand curve betweenQc and Qm; it is contained in the deadweight loss area GRC But consumers also lose the area of the rectangle bounded by the competitive and monopoly prices and by the monopoly output; this lost consumer surplus is transferred to the monopolist The fact that society suffers a deadweight loss due to monopoly is an efficiency problem But the transfer of a portion of consumer surplus to the monopolist is an equity issue Is such a transfer legitimate? After all, the monopoly firm enjoys a privileged position, protected by barriers to entry from competition Should it be allowed to extract these gains from consumers? We will see that public policy suggests that the answer is no Regulatory efforts imposed in monopoly cases often seek to reduce the Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 552