Deadweight Loss of Economic Welfare Explained

The idea of a deadweight loss relates to the consequences for economic efficiency when a market is not at an equilibrium. The concept links closely to the ideas of consumer and producer surplus.

Deadweight loss is relevant to any analytical discussion of the:

Impact of indirect taxes and subsidies
Introduction of maximum and minimum prices
The economic effects of trade tariffs and quotas
Consequences of monopoly power for consumer welfare

1. Taxes are often justified on grounds of market failure
2. Freely functioning markets often fail to take into account the effects of externalities from production and consumption
3. Try to analyse the effects of an intervention in terms of the likely net effect on economic and social welfare