What is a Deadweight Loss?

Deadweight loss is also the welfare loss, which refers to the social cost caused by the market is not in the optimal operating state, that is, the consumer surplus and the producer surplus lost when it deviates from the competitive equilibrium. .

Deadweight loss

society

In Figure 1, the equilibrium price is p 0 and the equilibrium output is Q 0.

Figure one

When the output is Q 0, the consumer's evaluation (ie, value) of increasing the consumption of a unit product is strictly equal to the marginal cost of the producer-product. If the supply curve is shifted to the left due to taxation and other reasons, so that consumers consume only Q 's products, then they increase the value p of consuming a unit product beyond the marginal cost C of producing a unit product. There is a gap between the demand curve and the cost curve. This gap represents the lost opportunity to create value for society. The triangle in the figure indicates the total value that society loses when output fails to increase from Q to Q 0.