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Deadweight Loss

Definition

A deadweight loss, also known as excess burden or allocative inefficiency, is a loss of economic efficiency that can occur when equilibrium for a good or a service is not achieved. That can be caused by monopoly pricing in the case of artificial scarcity, an externality, a tax or subsidy, or a binding price ceiling or price floor such as a minimum wage.

What is 'Deadweight Loss'

A deadweight loss is a cost to society created by market inefficiency. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. Price ceilings, such as price controls and rent controls; price floors, such as minimum wage and living wage laws; and taxation are all said to create deadweight losses.

Explaining 'Deadweight Loss'

Deadweight loss occurs when supply and demand are not in equilibrium. When consumers do not feel the price of a good or service is justified when compared to the perceived utility, they are less likely to purchase the item. With the reduced level of trade, the allocation of resources may become inefficient, which can lead to a reduction in overall welfare within a society.

Examples of Deadweight Losses

Minimum wage and living wage laws can create a deadweight loss by causing employers to overpay for employees and preventing low-skilled workers from securing jobs. Price ceilings and rent controls can also create deadweight losses by discouraging production and decreasing the supply of goods, services or housing below what consumers truly demand. Consumers experience shortages and producers earn less than they would otherwise.

Market Inefficiency

Market inefficiency occurs when goods within the market are either overvalued or undervalued. While certain members of society may benefit from the imbalance, others suffer consequences in regards to their welfare.


Further Reading


Tax avoidance and the deadweight loss of the income tax
www.mitpressjournals.org [PDF]
… Measuring the change in the dead- weight loss that would result from a change in the income tax … by a proportional rise in all personal income tax rates involves a deadweight loss of two … Similarly, there is no attempt to deal with the deadweight losses that arise from the rules …

Taxation and deadweight loss in a system of intergovernmental transfersTaxation and deadweight loss in a system of intergovernmental transfers
www.jstor.org [PDF]
… Measuring the change in the dead- weight loss that would result from a change in the income tax … by a proportional rise in all personal income tax rates involves a deadweight loss of two … Similarly, there is no attempt to deal with the deadweight losses that arise from the rules …

Nonparametric estimation of exact consumers surplus and deadweight lossNonparametric estimation of exact consumers surplus and deadweight loss
www.jstor.org [PDF]
… Measuring the change in the dead- weight loss that would result from a change in the income tax … by a proportional rise in all personal income tax rates involves a deadweight loss of two … Similarly, there is no attempt to deal with the deadweight losses that arise from the rules …

Exact consumer's surplus and deadweight lossExact consumer's surplus and deadweight loss
www.jstor.org [PDF]
… Measuring the change in the dead- weight loss that would result from a change in the income tax … by a proportional rise in all personal income tax rates involves a deadweight loss of two … Similarly, there is no attempt to deal with the deadweight losses that arise from the rules …

The deadweight loss of Christmas: commentThe deadweight loss of Christmas: comment
www.jstor.org [PDF]
… Measuring the change in the dead- weight loss that would result from a change in the income tax … by a proportional rise in all personal income tax rates involves a deadweight loss of two … Similarly, there is no attempt to deal with the deadweight losses that arise from the rules …

The economic cost of inadequate sleepThe economic cost of inadequate sleep
academic.oup.com [PDF]
… Measuring the change in the dead- weight loss that would result from a change in the income tax … by a proportional rise in all personal income tax rates involves a deadweight loss of two … Similarly, there is no attempt to deal with the deadweight losses that arise from the rules …

Taxes, organizational form, and the deadweight loss of the corporate income taxTaxes, organizational form, and the deadweight loss of the corporate income tax
www.sciencedirect.com [PDF]
… Measuring the change in the dead- weight loss that would result from a change in the income tax … by a proportional rise in all personal income tax rates involves a deadweight loss of two … Similarly, there is no attempt to deal with the deadweight losses that arise from the rules …

Social contract, taxation and the standing of deadweight lossSocial contract, taxation and the standing of deadweight loss
www.sciencedirect.com [PDF]
… Measuring the change in the dead- weight loss that would result from a change in the income tax … by a proportional rise in all personal income tax rates involves a deadweight loss of two … Similarly, there is no attempt to deal with the deadweight losses that arise from the rules …

The measurement of deadweight loss revisitedThe measurement of deadweight loss revisited
www.jstor.org [PDF]
… Measuring the change in the dead- weight loss that would result from a change in the income tax … by a proportional rise in all personal income tax rates involves a deadweight loss of two … Similarly, there is no attempt to deal with the deadweight losses that arise from the rules …



FAQ


What does deadweight loss measure?

Deadweight loss measures lost economic efficiency when the socially optimal quantity of a good or service is not produced.

Why would there be an excess burden in the case of monopoly pricing?

Because monopoly pricing creates an artificial scarcity.

How can a tax or subsidy create deadweight loss?

A tax or subsidy can create deadweight loss by changing the price that consumers are willing to pay for a good or service.

What is another way that government policy can cause deadweight loss?

Government policies such as minimum wage laws and price controls can also cause deadweight loss.

Is there any other way that deadweight losses may occur in the market place?

Yes, if there is no perfect competition, then there will be some form of market failure which will result in some type of inefficient outcome (dead weight).

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