Welfare Loss - Applying The Concept in Exams

What do we mean by the term deadweight welfare loss?

The deadweight welfare loss tries to identify & measure the loss in producer & consumer surplus due to an inefficient level of production and pricing.

This nearly always comes about because of one or more market failures.

In which topics might we use the deadweight welfare loss in our analysis?

Examples of topics include the following:

• Negative and positive externalities leading to market failure
• Monopoly pricing
• Indirect taxes including import tariffs
• Other forms of protectionism such as import quotas
• Price collusion between firms in an oligopoly

Using the deadweight welfare loss idea helps to build depth into your analysis. It also encourages you to develop your diagrams. Be aware that putting a monetary value on the deadweight loss can be difficult.

The idea of a deadweight loss relates to the consequences for economic and social welfare when a market is not at an equilibrium. Or when market prices do not fully reflect the social costs andsocial benefits of production and/or consumption. In other words – market failure.