Dictionary - Deadweight Loss

Definition

The decrease in overall social welfare in an economy that results from a market distortion. A deadweight loss occurs whenever there is no efficient market equilibrium.

Example

A common cause for deadweight losses is the imposition of a tax. If consumers have to pay a specific tax on ice cream, some of them will not be willing to pay the higher price and thus not buy anything. In other words, they won't make the purchases they would have made without the tax, which results in a loss of welfare for society.

Relevance

Since deadweight losses are caused by market distortions, virtually all government interventions (such as taxes, price ceilings, minimum wages, etc.) will result in a loss of social welfare. By looking at those deadweight losses, policy makers can compare the social costs of an intervention to the costs of existing inefficiencies. This allows to take actions that are in the best interest for society.