If a monopolist produces the allocatively efficient level of output rather than the profit-maximizing level, what happens to consumer surplus?

• A. It remains unchanged
• B. It increases due to reduction in deadweight loss
• C. It increases due to higher producer surplus
• D. It decreases due to higher prices

Answer: (B)

Allocative efficiency occurs where price equals marginal cost, so the quantity produced matches the true social demand. A monopoly typically produces where marginal revenue equals marginal cost, setting a price above marginal cost and causing deadweight loss from underproduction. If the monopolist instead produces at the allocatively efficient level, price falls toward marginal cost and the quantity increases toward the socially optimal amount. Consumers then enjoy a lower price and more units, expanding the area under the demand curve above the price—that is, consumer surplus grows. The gain in consumer surplus comes largely from the reduction in deadweight loss that existed under the monopoly.