Deadweight loss is the loss of total economic welfare that occurs when a good or service is produced or consumed at a quantity where the marginal benefit to society no longer equals the marginal cost, so some mutually beneficial trades never happen. It is the standard measure economists use for the inefficiency a tax, a price ceiling or floor, a monopoly, or an externality introduces into an otherwise well functioning market, because the value lost is not transferred to anyone, it simply disappears from the economy.
Facts
SignificanceDeadweight loss is the standard measure economists use for the inefficiency a tax, a price ceiling or floor, a monopoly, or an externality introduces into an otherwise well-functioning market, because taxes in particular prevent buyers and sellers from realizing some of the gains from trade. 1 No single economist is credited with proposing deadweight loss as a concept; Arnold Harberger is credited only with the graphical Harberger's triangle, a visualization tool, not the underlying concept, so proposed-by and origin-year are left unwritten. Classification
Concept Form Connections
Associated With
Pigou's enduring contribution, The Economics of Welfare (1920), introduced the externality concept and the Pigouvian tax as its remedy; the uncorrected welfare cost of an externality is the deadweight loss this atlas's concept describes. associated-with rather than attributed-to: Pigou generalized and formalized the welfare-cost analysis rather than originating the deadweight-loss concept itself.
Source Wikipedia
Sources
1. Wikipedia
Wikimedia FoundationDeadweight loss, Taxes and subsidies section
Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade.
Introduction, concept-form
Deadweight loss is the loss of total economic welfare that occurs when a good or service is produced or consumed at a quantity where the marginal benefit to society no longer equals the marginal cost, so some mutually beneficial trades never happen.
Associated With: Arthur Cecil Pigou, Arthur Cecil Pigou, Career and Contributions section
Pigou's most enduring contribution was The Economics of Welfare, 1920, in which he introduced the concept of externality and the idea that externality problems could be corrected by the imposition of a Pigovian tax.
View the Source Deadweight loss (Wikipedia)
Deadweight lossQuote, Deadweight loss
deadweight loss is the loss of societal economic welfare
Reader Challenges (0)
No disputes yet. Spotted an error or a better source? Open the first one.
Sign in to dispute this or suggest a correction.