Deadweight Loss

Definition

• Deadweight Loss: Refers to the loss of economic efficiency when equilibrium outcome is not achievable.
• It represents the cost to society due to market inefficiency.

Causes of Deadweight Loss

• Price Floors: Limits set by the government on how low a price can go (e.g., minimum wage).
• Price Ceilings: Limits on how high a price can be (e.g., rent control).
• Taxation: Government charges above the selling price, causing a loss in consumer surplus.

Imperfect Competition

• Arises from oligopolies and monopolies.
• Companies restrict supply to raise prices, leading to consumer loss and deadweight loss.

Example

• A bus ticket to Vancouver costs $20, valued at $35 by the consumer.
• A 100% tax increases the price to $40, leading to loss as the consumer does not purchase the ticket.
• The deadweight loss is the value of trips not taken due to the tax.

Graphical Representation

• Equilibrium price and quantity: $5 at 500 demand.
• New after-tax price: $7.50 at 450 demand.
• Taxes decrease consumer and producer surplus, creating tax revenue and deadweight loss.

Calculating Deadweight Loss

• Equilibrium before tax: Q0, P0.
• Tax shifts supply curve, affects prices received and paid by sellers and buyers.
• Deadweight loss is the area of trades not made due to tax.

Further Resources

• Fiscal Policy
• Normative Economics
• Economic Value Added
• GDP Formula

For further learning and resources, consider exploring courses and certifications related to finance and economics.