Explain how price regulation of a monopoly can reduce the social cost (deadweight loss) of monopoly.

Deadweight loss refers to the loss incurred due to an imbalance of market equilibrium that leads to market inefficiency. Unequal forces of demand and supply cause the imbalance of market equilibrium.

Price regulation can reduce deadweight loss since prices affect the demand for goods in the market. Price regulation can be used to reduce the social cost by altering the demand for the goods. For example, if the demand was higher than the supply price regulation can be used to decrease the demand for the goods by increasing the price, which imposes a substitution effect. A substitution effect is where customers go for alternative goods because the price of a good has increased. On the other hand, if the demand is low than the supply, the monopolist can lower the price of goods to attract more customers.