Explain why the deadweight loss from monopoly power may be exacerbated if the barrier to entry that creates monopoly power is created through exclusive government granting of a monopoly. For what types of government grants of monopoly power might this not be the case?

Question

What will be an ideal response?

Answer 1

The firm that gets the right to be a monopoly will earn positive economic profit. Thus, we would expect firms to expend effort to get that right -- and if that effort is socially wasteful, the deadweight loss is larger than the usual depiction of deadweight loss that arises from restricting quantity to raise price. But if the effort is socially useful -- such as the effort of investing in R&D to gain a patent for something that creates more consumer surplus, the deadweight loss might be less than what our usual picture shows.