deadweight loss

Examples of deadweight loss in the following topics:

• How Taxes Impact Efficiency: Deadweight Losses

  • In economics, deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal.
  • Deadweight loss can generally be referenced as a loss of surplus to either the consumer, producer, or both.
  • Harberger's triangle, generally attributed to Arnold Harberger, refers to the deadweight loss (as measured on a supply and demand graph) associated with government intervention in a perfect market .
  • The loss of the surplus, not recouped by tax revenues, is deadweight loss.
  • Deadweight loss, represented by Harberger's triangle, is the yellow triangle.

• Understanding and Finding the Deadweight Loss

  • In economics, deadweight loss is a loss of economic efficiency that occurs when equilibrium for a good or service is not Pareto optimal.
  • When deadweight loss occurs, there is a loss in economic surplus within the market.
  • Deadweight loss implies that the market is unable to naturally clear.
  • Causes of deadweight loss include:
  • Define deadweight loss, Explain how to determine the deadweight loss in a given market.

• Introduction to Deadweight Loss

  • This net harm is what causes deadweight loss.
  • Deadweight loss can be visually represented on supply and demand graphs .
  • Known as Harberger's triangle, the deadweight loss equals the area within the following three points:
  • This chart illustrates the deadweight loss created when a price floor is instituted on the market for a good.
  • The amount of deadweight loss is shown by the triangle highlighted in yellow.

• Reasons for Efficiency Loss

  • A monopoly generates less surplus and is less efficient than a competitive market, and therefore results in deadweight loss.
  • The monopoly pricing creates a deadweight loss because the firm forgoes transactions with the consumers.
  • The deadweight loss is the potential gains that did not go to the producer or the consumer.
  • As a result of the deadweight loss, the combined surplus (wealth) of the monopoly and the consumers is less than that obtained by consumers in a competitive market.

• Efficiency of Monopolistic Competition

  • Regardless of whether there is a decline in producer surplus, the loss in consumer surplus due to monopolistic competition guarantees deadweight loss and an overall loss in economic surplus .
  • Monopolistic competition creates deadweight loss and inefficiency, as represented by the yellow triangle.

• Short Run Outcome of Monopolistic Competition

  • Also, since a monopolistic competitive firm has powers over the market that are similar to a monopoly, its profit maximizing level of production will result in a net loss of consumer and producer surplus, creating deadweight loss.
  • This causes deadweight loss for society, but, from the producer's point of view, is desirable because it allows them to earn a profit and increase their producer surplus.

• Markets are Typically Efficient

  • An efficient market maximizes total consumer and producer surplus; there is no deadweight loss .
  • A sign of economic inefficiency in a market is the presence of deadweight loss.

• Tax Incidence, Efficiency, and Fairness

  • Tax incidence does not consider the concept of tax efficiency or the excess burden of taxation, also known as the distortionary cost or deadweight loss of taxation, is one of the economic losses that society suffers as the result of a tax.
  • If the product (apples) is price inelastic to the consumer (whereby if price rose, a small demand loss would be accounted for by the extra revenue), the farmer is able to pass the entire tax on to consumers of apples by raising the price by $1.
  • The loss is conceptually defined as a loss of surplus and the loss of surplus is characterized as deadweight loss.
  • Policy makers evaluate the surplus and deadweight loss in relation to the imposition of a tax in order to better evaluate the efficiency of a tax or the distortion that the imposed tax causes on the attainment of market equilibrium.

• Price Floor Impact on Market Outcome

  • This translates into a net decrease total economic surplus, otherwise known as deadweight loss.
  • The government could then sell the surplus off at a loss in times of a food shortage.

• Price Ceiling Impact on Market Outcome

  • This translates into a net decrease total economic surplus, otherwise known as deadweight loss.
  • This loss is signified in the attached chart as the yellow triangle.
  • The dead weight loss, represented in yellow, is the minimum dead weight loss in such a scenario.
  • If individuals who value the good most are not capable of purchasing it, there is a potential for a higher amount of dead weight loss.