How to eliminate deadweight loss

  • Regulation can (theoretically) eliminate deadweight loss from monopoly:
    • Mandating that the market price equals the firm’s marginal cost
    • Forcing the market price to equal the firm’s average cost
    • Imposing a price cap
    • Imposing a per-unit subsidy, thus lowering the firm’s marginal cost curve
    • Forcing the monopoly to dissolve (i.e. divest some of its assets)
    • Encouraging new firms to enter the market (e.g. subsidize entry costs)