The deadweight loss associated with a monopoly occurs because the monopolist

Question

BlackTom AI · Accepted Answer

The question asks why a monopoly creates deadweight loss and provides four statements to evaluate.
Option 1: 'maximizes profits.' This explains the monopolist's objective, not the source of deadweight loss. A monopolist maximizes profit by restricting output to raise price, but simply stating profit maximization does not itself identify the inefficiency—the DWL arises from the mismatch between monopolistic output and the socially optimal output, not from the fact that profits are being pursued.
Option 2: 'produces an output level less than the socially optimal level.' This directly identifies the core cause of deadweight loss in monopoly: the monopolist sets a quantity below the socially efficient point, creating forgone trades that would have yielded positive welfare for both consumers and the economy. The result is a loss of total surplus that is not offset by any corresponding gain elsewhere.
Option 3: 'produces an output level greater than the socially optimal level.' This is incorrect for a typical monopoly. Monopolies restrict output; they do not overproduce relative to the social optimum. Overproduction would not produce the classic DWL associated with monopoly; it would typically create other types of inefficiencies, but not the standard deadweight loss expected from underproduction in monopoly.
Option 4: 'equates marginal revenue with marginal cost.' This describes the profit-maximizing rule for a monopolist, so it is a true statement about how a monopoly decides quantity. However, stating this is not an explanation for why deadweight loss exists; it explains the mechanism of output choice rather than the welfare loss that arises because that choice is suboptimal from a societal perspective. Therefore, while factually correct about the profit-maximizing condition, it does not attribute the DWL properly.

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