Deadweight Loss Graph Explained

As illustrated in the graph deadweight loss is the value of the trades that are not made due to the tax.

Deadweight loss graph explained. Q1 and p1 are the equilibrium price as well as quantity before a tax is imposed. Taxes are often justified on grounds of market failure. A deadweight loss is a cost to society created by market inefficiency which occurs when supply and demand are out of equilibrium.

In economics a deadweight loss is defined as a loss to society as a whole. To figure out how to calculate deadweight loss from taxation refer. The blue area does not occur because of the new tax price.

Therefore no exchanges take place in that region and deadweight loss is created. Mainly used in economics deadweight loss can be applied to any. It is mainly caused by market inefficiencies or when equilibrium is not achieved.

Impact of indirect taxes and subsidies introduction of maximum and minimum prices the economic effects of trade tariffs and quotas consequences of monopoly power for consumer welfare. Deadweight loss p2 p1 x q1 q2 here s what the graph and formula mean. Deadweight loss is relevant to any analytical discussion of the.