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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The reduction of quantity from "b" to "c" comes at a dead-weight loss of only [gamma] + [epsilon] with a tax but is [beta] + [delta] larger with prohibition.
The cost to the taxpayer of law enforcement, to include the imprisonment of offenders, would have to be added to the dead-weight loss shown above.
This process artificially reproduces a situation similar to monopoly, where the outputs aren't optimal resulting in a social and economic dead-weight loss.
Fuchs writes that "[w]hile Fisher was quick to appreciate the theoretical points that supported NHI [national health insurance], he apparently never considered the dead-weight loss that might be expected from reducing the marginal cost of health care to zero.
As markets, experience, and the magnitude of outstanding financial instruments changed, the dead-weight loss created by such uncertainty--read: "risk"--became increasingly evident, as did the value of transparency.
The result is a dead-weight loss to the economy by the amount that health care consumption is greater than consumers would choose if they bore the full price, a sizeable economic inefficiency.
The distortionary effect of offsetting taxation is summarised by the parameter [Lambda] (corresponding to the dead-weight loss per one dollar of additional taxes).
But the cost to the government of delivering each acre-foot is $350, so the dead-weight loss to the national economy is $320.
Given the large potential financial gains to SAIF institutions if they move deposits to BIF, the current deposit insurance system will impose a large dead-weight loss on the financial system.
The dead-weight loss effected by the mandatory resale-royalty statute implies that the welfare-distributive effects of the statute are the opposite of those claimed for it by its supporters.
Nevertheless, because the prices people pay in making medical care decisions are much less than the resource cost, there is significant excess consumption and dead-weight loss to all systems that control prices or subsidize consumption.
Under conservative assumptions, Feldstein estimates that the Social Security tax creates a dead-weight loss of about 20 percent of Social Security revenues ($67 billion dollars in 1995).

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