deadweight loss

(redirected from Deadweight Losses)

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 ?
If one were to estimate small deadweight losses from the program, one could rest easy that Medicaid induces little inefficiency in consumption patterns.
Greenberg and Denzau's 1988 paper in this journal uses duality to demonstrate lucidly many important theorems about deadweight losses from taxes and subsidies.
By including deadweight losses associated with income tax changes, they argue that rational individuals will save not only for future additional taxes, but also for the associated deadweight losses.
wheat producers and domestic deadweight losses increased as a result of the U.
This paper demosntrates that far weaker information assumptions are needed to obtain an aggregate savings response equal to the deficit: a reallocation of deadweight losses causes Ricardians to save more than their share of the deficit to keep consumption unaffected, allowing for a substantial fractrion of Keynesians, who save less than their share.
By scaling back or eliminating excessive regulations, ubiquitous transfers, and needless complications in tax codes, government would increase freedom and reduce the deadweight losses (the value lost from the misallocation of resources) generated by regulations, transfers, and legal impediments.
That is, most unjust government policy creates large deadweight losses.
The Funding for Lending scheme, the National Loan Guarantee Scheme, and UK Guarantees are all welcome, although the design of the schemes means significant deadweight losses are likely.
The [section] 506 Solution to Deadweight Losses from
Again, deadweight losses are likely to be larger for larger societies, so for both the utilitarian welfare function and Sen's welfare function, the question of income redistribution becomes an empirical question.
How would this assumption affect tax revenues and deadweight losses (in both absolute and relative terms)?