deadweight loss


Also found in: Acronyms, Wikipedia.

Deadweight Loss

The loss of economic activity due to excessive taxation. For example, suppose a person on welfare is offered a job that pays more than he/she receives in welfare benefits. If taxes are too high, however, the person may find that his/her aftertax income is in fact lower than what he/she was receiving on welfare. The person might then rationally decide to stay on welfare. The deadweight loss is both the cost of keeping that person on welfare and the loss incurred from the economy at large from losing that person's production. It is also called the excess burden of taxation.
Deadweight lossclick for a larger image
Fig. 36 Deadweight loss .

deadweight loss

the reduction in CONSUMERS’ SURPLUS and PRODUCERS’ SURPLUS that results when the output of a product is restricted to less than the optimum efficient level that would prevail under PERFECT COMPETITION. Fig. 36 shows the demand and supply curves for a product, and their interaction establishes the equilibrium market price OP. At this price, consumers’ surplus is shown as the diagonally shaded area ABP and producers’ surplus as the vertically shaded area APO. If output is restricted from OQ to OQ1, then the price paid by consumers would rise to OP1 and consumers’ surplus would be reduced by the amount ACE, while the price received by producers would fall to OP2 and producers’ surplus would be reduced by the amount ADE.

Deadweight loss is particularly likely to occur in markets dominated by MONOPOLY suppliers who restrict output in order to keep prices high.

Mentioned in ?
References in periodicals archive ?
Possibly, but this is of speculative nature, this also led to a lower penetration of Internet in the US, which could in turn be associated with a deadweight loss.
Moreover, a theorem in economics shows that the size of the deadweight loss from a tax is proportional to the square of the tax rate.
Under baseline assumptions, we find that current price schedules impose more than $1 in deadweight loss for every $1 that is transferred to the bottom two income quintiles.
The first integral in the difference on the right-hand side is the deadweight loss without insurance [R.
This confers a deadweight loss of EFR on France for a total deadweight loss of KER.
One possible implication of this data is that high marginal tax rates on older workers generate greater deadweight loss than similarly high rates on prime-age individuals.
Under the utilitarian framework, income redistribution within a society will be warranted only if the marginal utility gained from giving a dollar to the poor is greater than the marginal utility lost from taking the dollar from the rich--both in terms of lost utility to the rich person and deadweight loss due to changed incentives and bureaucratic costs.
Giving cash gifts would seem to be a general panacea for eliminating the deadweight loss of holiday spending because recipients know their preferences better than would-be givers; however, Chapter 5 reveals that giving cash is plagued by a stigma of social unacceptability in many cases.
A by product of a tax rate increase is the deadweight loss associated with changes in tax revenue, which according to Feldstein is often likely to be equal to or greater than the direct revenue cost itself.
The deadweight loss caused by the tariff is represented by the triangle ABC.
One of the most well known of these pictures is the Harberger triangle, which is used to illustrate the deadweight loss from market restrictions such as monopoly power, quantity restrictions, and price ceilings and floors.