Critical Loss Of Social Welfare Under Monopoly
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.