Download Deadweight loss is the decrease in economic efficiency

Deadweight loss is the decrease in economic efficiency that occurs
when a good or service is not priced at its pareto optimal level.
LEARNING OBJECTIVE [ edit ]
Define deadweight loss
KEY POINTS [ edit ]
Deadweight loss can be caused by monopolies, binding pricecontrols, taxes, subsidies,
and externalities.
When deadweight loss occurs, it comes at the expense ofconsumer surplus and/or producer
surplus.
Deadweight loss can be visually represented on supply anddemand graphs as a figure known as
Harberger's triangle.
TERMS [ edit ]
deadweight loss
A loss of economic efficiency that can occur when anequilibrium is not Pareto optimal.
Pareto optimal
Describing a situation in which the profit of one party cannot be increased without reducing the
profit of another.
Give us feedback on this content: FULL TEXT [ edit ]
Deadweight loss is the decrease in economic efficiency that occurs when a good or service is
not priced and produced at its pareto optimal level. When output is at its pareto optimal
point, the price, production, and consumption of a good cannot be altered for one person's
benefit without making at least one other worse off. In a perfectly competitive market,
products are priced at the pareto optimal
point.
When deadweight loss occurs, it comes at
the expense of either the consumer
economic surplus or the producer's
economic surplus. Consumer surplus is
the gain that consumers receive when
they are able to purchase a product for
less than the price they are willing to pay;
producer surplus is the benefit producers
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receive when the sell a product for more
than they are willing to sell for. While price controls, subsidies and other forms of
market interventionmight increase consumer or producer surplus, economic theory states
that any gain would be outweighed by the losses sustained by the other side. This net harm is
what causes deadweight loss.
Deadweight loss can be visually represented on supply and demand graphs . Known as
Harberger's triangle, the deadweight loss equals the area within the following three points:
Price
Supply curve
Market price at equilibrium
Consumer
surplus
Deadweight
loss
Free market equilibrium
Price ceiling
Producer
surplus
Demand
curve
Equilibrium quantity
Market quantity with price ceiling
Quantity
Deadweight loss
This chart illustrates the deadweight loss created when a price floor is instituted on the market for a
good. The amount of deadweight loss is shown by the triangle highlighted in yellow. This area is known
as Harberger's triangle.
where the supply and demand curve intersect, otherwise known as the free market
equilibrium;
the point on the supply curve where the y­coordinate equals the non­pareto optimal
price;
the point on the demand curve where the y­coordinate equals the non­pareto optimal
price.
Example ­ Price Ceilings and Deadweight Loss
The chart above shows what happens when a market has a binding price ceiling below the
free market price. Without the price ceiling, the producer surplus on the chart would be
everything to the left of the supply curve and below the horizontal line where y equals the
free market equilibrium price. The consumer surplus would equal everything to the left of
the demand curve and above the free market equilibrium price line. With the price ceiling, instead of the producer's surplus going all the way to the pareto
optimal price line, it only goes as high as the price ceiling.The consumer surplus extends
down to the price ceiling, but it is limited on the right by Harberger's triangle. In this case,
the reason for that limitation is due to quantity produced. The consumer would purchaser
more of the product at the ceiling price, but the producers are unwilling to supply enough to
meet that demand because it is not profitable. As a result all of the goods that might have
been produced and consumed if the good was priced optimally are not, representing a net
loss for society.