Deadweight loss is the fall in total surplus that results from a market distortion, such as a tax. In economics, a deadweight loss (also known as an excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable.
Under limited circumstances, it can be assumed that monopolies are the cause of welfare losses. The welfare loss, in this case, is based on the assumption that the monopolies cause one or more inefficiencies. Basically, the reduction of the consumer's pension is seen as a welfare loss. Marshall defines it that way, on condition that the optimality conditions of the comprehensive competition are disturbed.
Monopolies can have positive effects and are not always the cause of a welfare loss. A technical advance or a short-term maximization of profit may have beneficial effects, but will not be considered in this analysis.
A loss of welfare occurs when the number of goods produced deviates from the optimal amount. The balance in the competitive market would be disturbed. In theory, welfare losses can be calculated. Taxes, duties, and prices, as well as monopoly formations, are included in the calculation. A consideration of the welfare loss is never complete. Future effects cannot be included in the calculation because the market and the behavior of the consumers are subject to a certain dynamic.
Calculate welfare loss
Welfare loss, also called deadweight loss , can be calculated using the following formulas:
Function of the market offer: S (p) = 50 + p
First, this function can be compared and calculated in lockstep:
p = 50; x = 100
Finally, the quantity tax is included in the calculation. Here we assume a tax rate of 7.5 percent:
135 = 3p
Including the quantity tax, p = 45 and x = 95. The welfare loss can be calculated as follows:
W = 0.5 * 7.5 * (100-95) W = 18.75
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