1)How does oligopoly differ from monopoly and perfect competition?

2)Define externality.

3)Why does a monopoly cause a deadweight loss?

1)Oligopoly differs from monopoly and perfect competition because in an oligopoly a few businesses make up the entire industry and it is extremely difficult for new businesses to start up in that industry. The difficulty usually results from patents, government restrictions, or other similar barriers. If, for example, there were only three major chocolate bar producers in the United States and it were prohibitively difficult for new chocolate bar makers to move into the marketplace, this would be an oligopoly. By contrast, in a monopoly, there is only one firm that dominates the industry and in perfect competition there are a number of different firms in the industry and it is not prohibitively difficult for a new firm to enter.

2)An externality is a consequence of an action that exists outside, or external, of the parties involved. For example, when I drive a car, I benefit from being able to quickly travel between two locations. But I create an externality of increasing pollution, for which I do not directly pay for.

3)

Deadweight loss happens when total society welfare is not maximized in the economy. Monopolies cause deadweight losses because they have the tendency to produce less and charge more; this causes an imbalance in supply and demand.

When a company is the sole producer of a product, they have the power to raise prices and keep the supply low, which is not pareto-optimal. Another factor to consider in how monopolies can lead to deadweight loss is the lack of motivation to be innovative. If a company produces a unique product and the prices continue to increase, but the quality does not, consumers are likely to stop purchasing the products. Deadweight loss is detrimental to the economy.