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In economics, deadweight loss is the loss of societal economic welfare due to production/consumption of a good at a quantity where marginal benefit (to society) does not equal marginal cost (to society) – in other words, there are either goods being produced despite the cost of doing so being larger than the benefit, or additional goods are not being produced despite the fact that the ...
The deadweight loss is the efficiency lost by implementing the price-support system. It is the change in total surplus and includes the value of the government purchase, and is equal to $1100. It is the change in total surplus and includes the value of the government purchase, and is equal to $1100.
An example of a good with generally high consumer surplus is drinking water. People would pay very high prices for drinking water, as they need it to survive. The difference in the price that they would pay, if they had to, and the amount that they pay now is their consumer surplus.
A common position in economics is that the costs in a cost-benefit analysis for any tax-funded project should be increased according to the marginal cost of funds, because that is close to the deadweight loss that will be experienced if the project is added to the budget, or to the deadweight loss removed if the project is removed from the budget.
This loss occurs because taxes create disincentives for production. The gap between taxed and the tax-free production is the deadweight loss. [4] Deadweight loss reduces both the consumer and producer surplus. [5] The magnitude of deadweight loss depends on the elasticities of supply and demand for the taxed good or service.
Hence first degree price discrimination can eliminate deadweight loss that occurs in monopolistic markets. [22] Examples of first degree price discrimination can be observed in markets where consumers bid for tenders, though, in this case, the practice of collusive tendering could reduce the market efficiency. [31]
The filled-in "wedge" created by a tax actually represents the amount of deadweight loss created by the tax. [2] Deadweight loss is the reduction in social efficiency (producer and consumer surplus) from preventing trades for which benefits exceed costs. [2] Deadweight loss occurs with a tax because a higher price for consumers, and a lower ...
In reality, however, the net wage is the gross wage times one minus the tax rate, all divided by the price of consumption goods. With the status quo income tax, deadweight loss exists. Any addition to the price of consumption goods or an increase in the income tax extends the deadweight loss further.