Deadweight Loss


DEFINITION of 'Deadweight Loss'

The costs to society created by market inefficiency. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. Price ceilings (such as price controls and rent controls), price floors (such as minimum wage and living wage laws) and taxation are all said to create deadweight losses. Deadweight loss occurs when supply and demand are not in equilibrium.


Loading the player...

BREAKING DOWN 'Deadweight Loss'

Minimum wage and living wage laws can create a deadweight loss by causing employers to overpay for employees and preventing low-skilled workers from securing jobs. Price ceilings and rent controls can also create deadweight losses by discouraging production and decreasing the supply of goods, services or housing below what consumers truly demand. Consumers experience shortages and producers earn less than they would otherwise. Taxes are also said to create a deadweight loss because they prevent people from engaging in purchases they would otherwise make because the final price of the product will be above the equilibrium market price.

  1. Equilibrium

    The state in which market supply and demand balance each other ...
  2. Deadweight Loss Of Taxation

    A loss of economic well-being imposed by a tax. The loss occurs ...
  3. Living Wage

    A theoretical wage level that allows the earner to afford adequate ...
  4. Lucas Wedge

    The aggregate amount of loss in output for an economy that is ...
  5. Economic Efficiency

    A broad term that implies an economic state in which every resource ...
  6. Elastic

    A situation in which the supply and demand for a good or service ...
Related Articles
  1. Economics

    What is Deadweight Loss?

    Deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.
  2. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  3. Economics

    The Uncertainty Of Economics: Exploring The Dismal Science

    Learning about the study of economics can help you understand why you face contradictions in the market.
  4. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  5. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  6. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  7. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  8. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  9. Forex Education

    Explaining Uncovered Interest Rate Parity

    Uncovered interest rate parity is when the difference in interest rates between two nations is equal to the expected change in exchange rates.
  10. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  1. For what sorts of purposes can the funds in a share premium account be disbursed?

    Deadweight loss is the cost of market inefficiencies due to government regulations that prohibit natural market equilibrium. ... Read Full Answer >>
  2. Will a hike in the minimum wage result in deadweight loss to businesses and labor?

    There have been studies which show that hikes in minimum wage create deadweight loss to business and labor. It is possible ... Read Full Answer >>
  3. What is the formula for calculating deadweight loss in Excel?

    To calculate deadweight loss in Excel, tax rate data and elasticity of demand values should be available. Using these two ... Read Full Answer >>
  4. What are some disadvantages of a mixed economic system?

    From a purely consequentialist or utilitarian point of view (that is, avoiding moral or philosophical arguments), critics ... Read Full Answer >>
  5. How do economists measure positive and negative externalities?

    In economics, an externality is defined as a cost or benefit incurred by a third party as a result of economic activity to ... Read Full Answer >>
  6. Do businesses in states with right-to-work laws have demonstrably less deadweight ...

    Deadweight loss from union activity is believed to represent as much as 0.04% of the gross domestic product (GDP) as of 2 ... Read Full Answer >>
  7. Are progressive taxes ever more unfair that flat taxes?

    Progressive taxes assign a different tax rate to different taxpayers. Affluent taxpayers pay the highest income tax rates ... Read Full Answer >>
  8. Is a progressive tax more fair than a flat tax?

    Progressive taxation versus flat taxation inspires ongoing debate, and both have proponents and critics. In the United States, ... Read Full Answer >>
  9. How does adverse selection contribute to market failure?

    Adverse selection is perhaps the most academically cited example of market failure in a laissez-faire economy. The problem ... Read Full Answer >>
  10. Are perfect competition models in economics useful?

    Perfect competition is the name used for a set of false assumptions of mainstream economists in models that, without those ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center