Deadweight loss created by a binding price ceiling. A price ceiling is a government-imposed limit on how high a price can be charged on a product Producer surplus is necessarily decreased, while consumer surplus may or may not increase; however the decrease in producer surplus must be greater than the increase (if any) in consumer surplus. The term surplus is used in Economics for several related quantities The term surplus is used in Economics for several related quantities

In economics, a deadweight loss (also known as excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. Economics is the social science that studies the production distribution, and consumption of goods and services. Pareto efficiency, or Pareto optimality, is an important concept in Economics with broad applications in Game theory, Engineering and the In other words, either people who would have more marginal benefit than marginal cost are not buying the good or service or people who would have more marginal cost than marginal benefit are buying the product. Marginalism is the use of Marginal concepts within Economics. In Economics and Finance, marginal cost is the change in Total cost that arises when the quantity produced changes by one unit

Causes of deadweight loss can include monopoly pricing (see artificial scarcity), externalities, taxes or subsidies (Case and Fair, 1999: 442), and binding price ceilings or floors. In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient Artificial scarcity describes the Scarcity of items even though the technology and production capacity exists to create an abundance In Economics, an externality is an impact on any party not directly involved in an economic decision Taxes and subsidies have the effect of shifting the quantity and price of goods A price ceiling is a government-imposed limit on how high a price can be charged on a product A price floor is a government- or group-imposed limit on how low a price can be charged for a product The term deadweight loss may also be referred to as the "excess burden of monopoly" or the "excess burden of taxation".

Example

For example, consider a market for nails where the cost of each nail is 10 cents and that the demand will decrease linearly from a high demand for free nails to zero demand for nails at $1. 10. In a perfectly competitive market, producers would have to charge a price of 10 cents and every customer whose marginal benefit exceeds 10 cents would have a nail. In Neoclassical economics and Microeconomics, perfect competition describes a market in which no buyer or seller has Market power. However if only one producer has a monopoly on the product, then they will charge whichever price will yield the highest profit. For this market, the producer would charge 60 cents and thus exclude every customer who had less than 60 cents of marginal benefit. The deadweight loss is then the economic benefit forgone by these customers due to the monopoly pricing.

Conversely, deadweight loss can also come from consumers buying a product even if it costs more than it benefits them. To see this, let's use the same nail market, but instead it will be perfectly competitive with the government giving a 3 cent subsidy to every nail produced. This 3 cent subsidy will push the market price of each nail down to 7 cents. Some consumers then buy nails even though the benefit to them is less than the real cost of 10 cents. This unneeded expense then creates the deadweight loss.

Hicks vs. Marshall

An important distinction should be drawn between Hicksian and Marshallian deadweight loss. Sir John Richard Hicks ( April 8, 1904 May 20, 1989) was one of the most important and influential Economists and Religious Inclusivists Alfred Marshall (born 26 July 1842 in Bermondsey, London, England, died 13 July 1924 in Cambridge The latter is related to the concept of consumer surplus, such that it can be shown that the Marshallian deadweight loss is zero where demand is perfectly elastic or supply is perfectly inelastic. The term surplus is used in Economics for several related quantities In Economics, elasticity is the ratio of the percent change in one variable to the percent change in another variable On the other hand, Hicks analyzed the situation through indifference curves and noted that when the Marshallian Demand Curve exhibits perfect inelasticity, the policy or economic situation which caused a distortion in relative prices will have an income effect and that this income effect is a deadweight loss. In Microeconomic theory, an indifference curve is a graph showing different bundles of goods, each measured as to quantity between which a consumer Alfred Marshall (born 26 July 1842 in Bermondsey, London, England, died 13 July 1924 in Cambridge Relative price is the Price of a commodity such as a good or service in terms of another ie the ratio of two prices

References

• Case, Karl E. & Fair, Ray C. (1999). Ray Clarence Fair (born October 4, 1942 in Fresno, California) is the John M Principles of Economics (5th ed. ). Prentice-Hall. ISBN 0-13-961905-4.