deadweight loss
[deadweight loss|deadweight loss] is loss in total surplus that occurs when the economy produces at an inefficient quantity.
Definition
deadweight loss is loss in total surplus that occurs when the economy produces at an inefficient quantity. The loss in social surplus that occurs when the economy produces at an inefficient quantity is called deadweight loss. Deadweight loss happens when market mechanisms fail to allocate resources efficiently, resulting in a reduction of total surplus.
Mechanism
The mechanism of deadweight loss involves the price paid by consumers for protected goods. Part of this higher price results in lost economic efficiency. This inefficiency is measured as an additional deadweight loss, similar to cases discussed in Labor and Financial Markets.
Causes
deadweight loss [deadweight loss] occurs when price controls block transactions between willing suppliers and demanders, resulting in a loss of economic efficiency. This loss is measured as the area U + W in [link] (a). Both consumer and producer surplus can be higher in such cases, but the overall market efficiency is reduced due to the price control mechanism.
Effects
deadweight loss [deadweight loss] occurs when a price floor causes a transfer of surplus from consumers to producers, resulting in a loss of total surplus represented by areas H + I and J + K. This loss reduces the overall economic efficiency, as some mutually beneficial transactions are blocked by the price control. The deadweight loss is also depicted as areas U + W in the linked diagram, illustrating the reduction in both consumer and producer surplus due to market distortions.