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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.

Deadweight welfare loss is an economic concept that refers to the reduction in economic efficiency that occurs when a market is not in equilibrium. It is a measure of the harm caused to society by market inefficiency, such as price controls, taxes, or subsidies.

In a perfectly competitive market, buyers and sellers will transact at the market price, and the quantity of goods and services produced will be equal to the quantity demanded. However, when market distortions are present, such as taxes or subsidies, the market price will be different from the equilibrium price, and the quantity produced will be different from the quantity demanded. The difference between the equilibrium quantity and the actual quantity is the deadweight welfare loss.

It can be represented graphically as the area between the supply and demand curves, below the market price and above the equilibrium price. This area represents the surplus that is lost due to the market distortion and can be considered as the cost of inefficiency in the market.

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