Deadweight Loss
IntermediateDeadweight loss is the loss of total economic benefit to society that occurs when a market does not operate at its efficient level, often because of taxes, price controls or monopoly power.
When a market is at equilibrium, it creates the greatest possible combined benefit for buyers and sellers, measured by consumer and producer surplus. If something pushes the market away from equilibrium, some trades that would have benefited both sides no longer happen. The benefit lost from those missing trades is the deadweight loss.
Consider a tax on a product. It raises the price buyers pay and lowers the price sellers receive. Some buyers who would have bought at the original price now do not, and some sellers stop producing. Some of the lost surplus becomes tax revenue for the government, but part of it disappears entirely, benefiting no one. That disappearing part is the deadweight loss.
Price ceilings, price floors, quotas and monopolies can all create deadweight loss. A monopoly, for example, may restrict output to keep prices high, so some customers who would happily pay more than the cost of production go without.
Deadweight loss is one of the main ways economists measure the efficiency costs of policies.
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