deadweight loss

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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.
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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.

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So far, Scotland has seen little reduction to its tax revenues due to migration or dead weight loss since it took control of the Scottish Rate of Income Tax (SCRIT) in 2017.
The fee also creates a dead weight loss in the economy, equal to the shaded area a-b-c.
However, the report cautions that public support can only target areas where there is a market failure and would have to avoid wasting public resources and creating dead weight loss. Clear quantitative goals would have to be established, and a monitoring tool would be required to assess the results.
Moreover, profit for any and all firms ([pi]) and dead weight loss (DWL) are both zero, that is,
Similar to calculating consumer surplus, dead weight loss can be calculated per consumer group and then summed.
In particular, moving from a nondiscrimination pricing scheme to a form of price discrimination need not improve economic efficiency (decrease dead weight loss).
Area E is the social welfare loss, or dead weight loss.
The dead weight loss and social welfare loss are the same and are equal to area E, or $12.
The social welfare loss was BC dollars, where B was the transaction cost and C was the dead weight loss triangle.
But part of the dead weight loss still remains, namely the production cost.
In this single-price monopoly case, the sum of profit and consumer surplus is $242.70, so the dead weight loss is $32.30.
Note that the dead weight loss (= $68.75) has risen relative to the single-price monopoly situation.