Today Is Day Of The Deadweight Loss

On this day, economists mourn all the social welfare that has been lost in the last year. That social welfare is lost and we will never get it back. 

Deadweight loss is the loss of social welfare caused by that dreaded demon, inefficiency. Examples are monopoly and externalities. To learn more, go the following link:

Deadweight_loss

One good way to commemorate this day would be to cut out the deadweight loss triangle from a monopoly graph (like the one shown below) and burn it, to symbolize all of the lost social welfare. Doing so is both a life-changing and life-affirming ritual.

In the graph above, the monopoly price is Pm and it is greater than MC at the monopoly Q (Qm). All firms choose Q so that Marginal Revenue (MR) =  Marginal Cost (MC). If P does not = MC then we don't get the optimal Q.

A demand line is also a marginal benefit line since it tells us the price you are willing to pay for a good. Your benefit has to be at least that high or you would not buy the item.

If Pm = $15 that means the consumer got at least $15 in benefits. Let's say the MC is  $10. Society gained by producing the last unit (Qm). The next unit might bring $14 in benefits but still only cost $10 to make. Society would gain from it but the monopolist stops producing at Qm. All the gains that we don't realize from this good equal the size of the yellow triangle. The optimal quantity is Qc, where P = MC.