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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To summarize: the aversion of the economics profession to the deadweight losses caused by protectionism seems warranted.
There is no perspective on whether these fines are to be balanced with the deadweight loss in social welfare caused by the cartel and the effects of future deterrence.
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For example, Moore et al (2010: 9) defer to the 'default deadweight loss recommended by the [New Zealand] Treasury' of 20 per cent.
A review of every final rule in the Federal Register from 1994 to present found just five rules (out of 1,400 major regulations issued over the past 20 years) that monetized the value of deadweight loss to the economy.
This started a lively debate among economists whether and to what extent in-kind gifts actually entail a deadweight loss. Asking for the WTA, Solnick and Hemenway (1996) find a 214% welfare gain.
Of course, this leads a society-wide deadweight loss,
For the counterfactual we report aggregate output (normalized), total variable costs, deadweight loss and dead weight loss share.
The most salient of these is the deadweight loss that monopoly prices impose upon consumers.
"The deadweight loss that flows from India's states treating their internal boundaries as though they were international borders is apparent to all," he said.
In the case of the single-price monopolist, we are left with an area of deadweight loss. Deadweight loss occurs due to the inefficient quantity being sold.
When the financial risk protection of the program is considered, it is likely that the benefits of the program greatly outweighed the deadweight loss of the reform across all scenarios.