ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Deadweight loss refers to the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved. In other words, it is the cost born by society due to market inefficiency.

Detailed explanation-2: -Harberger’s triangle The deadweight loss is the area of the triangle bounded by the right edge of the grey tax income box, the original supply curve, and the demand curve. It is called Harberger’s triangle.

Detailed explanation-3: -Efficiency loss occurs when an optimal level of good or service is not produced. The optimal level is the equilibrium level when the demand and supply curves, including external benefits and cost for positive and negative externality cases, are equal. Any point other than this level leads to efficiency loss.

Detailed explanation-4: -Definition: It is the loss of economic efficiency in terms of utility for consumers/producers such that the optimal or allocative efficiency is not achieved.

Detailed explanation-5: -The total amount of the deadweight loss therefore also depends on the elasticities of demand and supply. The smaller these elasticities, the closer the equilibrium quantity traded with a tax will be to the equilibrium quantity traded without a tax, and the smaller is the deadweight loss.