What is Deadweight Loss?
- Deadweight loss is the reduction in total surplus that results from a market distortion such as a tax.
How Do I Remember It?
- Think of deadweight loss as the “lost value” in a market. It’s like the economic value that disappears when a market is not functioning efficiently due to external factors.
Real World Example
- Think of a tax imposed on a certain good. This tax increases the price paid by consumers and decreases the price received by producers, reducing the quantity bought and sold in the market. The difference between the price consumers are willing to pay and the price producers are willing to accept for this reduced quantity represents the deadweight loss caused by the tax.
Follow us on TikTok, Instagram, and YouTube below.
By: Ryan Aquino
