The deadweight loss calculator is a tool that helps you determine the lost revenue that results from the existence of an inelastic demand curve. Inelastic demand is when consumers do not respond to changes in price, and their quantity demanded stays relatively stable regardless of how much they have to pay for something. A good example of this would be a bus ticket or restaurant bill: if you increase the price by 10%, people will still buy at least 95% of what they bought before at the lower price point. The deadweight loss calculator takes into account costs incurred during production as well as consumer surplus losses due to higher prices for goods that are affected by this phenomenon.
Definition of deadweight loss
A deadweight loss is a loss in consumer and producer surplus caused by a tax or a subsidy, an increase in price controls, or a decrease in quantity supplied.
In economics, economists use the term “deadweight loss” to refer to the loss of economic efficiency from an externality. An externality occurs when some people are affected by another person’s decision but don’t bear any cost or receive any benefit from it directly. An example of this would be if one person throws trash on someone else’s front lawn instead of disposing of it properly himself; this affects everyone who lives around him but they don’t get anything out of it themselves (unless they decide not to take care of their own garbage).
Uses of deadweight loss
The deadweight loss of a tax is the amount that society loses as a result of the tax. It is measured by comparing the difference in consumer and producer surplus before and after taxation, with both before and after accounting for any indirect effects from other parts of the economy.
Deadweight loss is a measure of inefficiency in an economy caused by government intervention in free markets or government failure to correct externalities such as pollution that lead to deadweight losses. In some cases, deadweight loss can be reduced by making adjustments to policies or regulations which would reduce its size (such as through policy changes).
History
The deadweight loss was first described by Adam Smith in 1776, who used the term “the loss which the society suffers” to describe a situation where one party gains and another loses as a result of a transaction.
In 1920, Arthur Cecil Pigou coined the term “deadweight loss” in his book The Economics of Welfare. He argued that when taxes were levied on goods or services with external costs (i.e., those that harm others), it resulted in deadweight losses for society because those goods were no longer traded freely on their own merits.
In 1929, John Hicks developed this idea further in his book Value and Capital by analyzing how changes in income distribution affect trade and welfare. Hicks’ work popularized the concept of deadweight loss among economists—it became widely recognized as an important economic concept after he published his paper “Mr. Keynes and the ‘Classics’; A Suggested Interpretation” in 1937.
FAQ
What is the effect of deadweight loss?
Deadweight loss of taxation measures the overall economic loss caused by a new tax on a product or service.
Why do taxes cause deadweight loss?
Taxes create deadweight loss because they prevent people from buying a product that costs more after taxing than it would before the tax was applied.
Why does a monopoly cause a deadweight loss?
The monopoly charges a price above its marginal cost, so not all consumers who value the good at more than its marginal cost are able to buy it.
