Why is the producer surplus highest in a monopoly?

1 Answer
Mar 6, 2016

Producer’s surplus is highest in monopoly because a monopolist can discriminate among his customers by charging the maximum possible price from each buyers.


Under first degree discriminating monopoly, a monopolist is able to charge the price the consumer is willing to pay.

Producer's Surplus (Monopolist)

Generally, the area BPE denotes producer’s surplus. This is because the producer charges the same price ‘P’ from all the customers.

Under Monopoly, the monopolist charges the price shown by the segment FE from his customers.  It means he charges the maximum price the consumers are willing to pay for his good.  Hence for a monopolist ,  the producer’s surplus is denoted by the area BFE.  The producer’s surplus of a monopolist is the heighest.