Monopolies tend to decrease consumer surplus while increasing producer surplus within a market.

In a competitive market, prices are determined by the forces of supply and demand, resulting in an equilibrium price that maximizes both consumer and producer surplus. In contrast, a monopoly exists when a single supplier dominates the market, allowing the monopolist to set prices above the competitive equilibrium. This price manipulation leads to a reduction in consumer surplus and an increase in producer surplus.

Consumer surplus is defined as the difference between the price consumers are willing to pay for a good or service and the actual price they pay. In a competitive market, consumer surplus is maximized due to competition driving prices down. However, a monopolist can establish prices that exceed the competitive equilibrium, which diminishes consumer surplus. This occurs because consumers lack alternative suppliers and must either accept the higher price or forgo the good or service altogether. Consequently, this scenario can result in a loss of welfare for consumers, especially if the good or service is essential.

On the other hand, producer surplus represents the difference between the price producers are willing to accept for a good or service and the price they actually receive. In a competitive market, producer surplus is minimized as competition drives prices down. Conversely, a monopolist can set prices above the competitive equilibrium, thereby increasing producer surplus. The absence of competition allows the monopolist to charge higher prices, which can lead to greater profits. However, this situation may also generate inefficiencies in the market, as the monopolist has less incentive to reduce costs or innovate.

Moreover, monopolies can create a deadweight loss within the economy. This loss of economic efficiency arises when the competitive equilibrium is not achieved. In a monopoly, the monopolist sets prices above the competitive equilibrium, resulting in lower quantities produced and consumed than would occur in a competitive market. This discrepancy leads to a loss of both consumer and producer surplus, ultimately diminishing overall welfare in the economy.

In summary, while monopolies may enhance producer surplus, they typically result in a decline in consumer surplus and overall economic welfare. This is why regulatory authorities often intervene to prevent the formation of monopolies or to oversee their operations.