DEADWEIGHT LOSSBy Christopher Renus

Key concepts

Deadweight loss is lost consumer and producer surplus that would occur in an efficient market

Deadweight loss is caused by a tax, a price ceiling, or the pricing from a monopoly.

More elastic supply, the more deadweight loss

Monoplies

Deadweight loss due to that a monopoly restricts supply below the socially efficient quantity

Taxation

Lost value to consumers and producers due to reduction in sales of the good

Eco Art

Multiple Choice

A monopoly will result in deadweight loss because 

 A. it creates more total surplus than a perfect competitor. B. It creates less total surplus than a perfect competitor. C. It produces a quantity that is allocatively efficient.

 D. It produces a quantity that is not productively efficient.

D, Monopolies produce at a lower quantity

5. A deadweight loss is a consequence of a tax on a good because the tax

a. induces the government to increase its expenditures.

b. induces buyers to consume less, and sellers to produce less, of the good.

c. causes a disequilibrium in the market.d. imposes a loss on buyers that is greater

than the loss to seller

B, The supply curve shifts to the left.

Assume that the original supply and demand curves of a commodity are S and D, respectively. Also assume that the government imposes an excise tax (per unit tax)

16. The dead weight efficiency loss created by the tax is equal to

(A) P,GHPo(B) P,GKPo(C) GHK(D) GKl(E) zero

D, GKI is the area of deadweight loss

Free Response

1. A. Assume that the market for doodads has an equilibrium price of $10. At this price suppliers produce 1,000 units. Draw a supply and demand graph illustrating the market doodads.

B. Indicate equilibrium price and quantity on your graph.

2. A. The government imposes a maximum price of $12 on the price of doodads. Explain the effect on the equilibrium price that this price ceiling will have?

3. A. Now assume that the government imposes a minimum price of $12 on the price of doodads. Illustrate this price control on your graph.

B. Determine whether a shortage or surplus is created. Indicate the quantity of this shortage or surplus.

C. Illustrate the welfare loss that occurs at a price of $12

Real life examples

http://larrymwalkerjr.blogspot.com/2011/10/obamacares-deadweight-loss.html

http://www.thenewstribune.com/2011/12/21/1953437/all-i-want-for-christmas-is-an.html