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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References in periodicals archive ?
Principe and Eisenhauer (2009), focusing on the actual price rather than the recipients' estimated costs of the present, find an average deadweight loss of more than 7%.
Marginal Deadweight Loss when the Income Tax Is Nonlinear," by Soren Blomquist and Laurent Simula.
The most salient of these is the deadweight loss that monopoly prices impose upon consumers.
This type of discrimination is efficient in the sense that social welfare is maximized, that is, there is zero deadweight loss, but it clearly hurts consumers even when compared to the case of the single price monopolist.
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.
This value that has an effect on the producer's surplus is not found in the consumer's surplus and, therefore, neither in the social surplus, thus representing a deadweight loss.
Keywords: Deadweight Loss, Farm Programs, Rent Seekers
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.
This Commentary explores the economic reasoning behind fast-tracking and estimates the size of the deadweight loss that could be eliminated by creating an effective foreclosure fast-track in Ohio and Pennsylvania, two states in the Federal Reserve Bank of Cleveland's District.
JOEL WALDFOGEL PROBABLY KNEW BETTER in his heart when he published an article on "the deadweight loss of Christmas" in 1993.
S]HJCBA, and the deadweight loss R0 is represented by the sum of the lightly and heavily shaded areas (the tetragon ABCD).