Harper Marsolek Competitive Market Environment: Deadweight Losses
Deadweight loss “occurs when supply and demand are not in equilibrium” (Tuovila, 2022). In economics within the market, there is a “deficiency caused by an inefficient allocation of resources” (Tuovila, 2022). This inefficient allocation of resources happens when goods in the market are over and/or undervalued (Tuovila, 2022). There are multiple causes of deadweight losses that include: price ceilings (price and rent controls), price floors (minimum and living wage), monopolies, and taxation (Tuovila, 2022). Price ceilings are set by the government and prevent sellers from charging a higher price for their goods and/or services (Agarwal, 2022). This cause of deadweight loss makes production of the goods less attractive resulting in the supply being lower than the demand (Agarwal, 2022). Price floors are conversely price controls that prevent companies from “charging less than a specific amount for the goods or services provided” (Agarwal, 2022). Monopolies cause deadweight loss because the profits are solely private and “accrue to the monopolizing firms” (Agarwal, 2022). In addition, monopolies set the price above marginal cost, which in turn can create a gap between the company’s costs and the consumers of the goods and/or services produced (Agarwal, 2022). Lastly, taxation are charges from the government that can dictate an increase in the price of products, which would directly decrease the demand for the good and/or service (Agarwal, 2022). These causes of deadweight loss are ultimately unavoidable to society, and can result in most individuals being impacted by this shift in the market when deadweight loss transpires.
Since deadweight loss causes market inefficiency, it effects both sides (consumers and companies) of the trading line. In the market, the consumer will be missing out on the goods and/or products to purchase as well as the companies that will lose potential revenue (Masterclass, 2022). When supply and demand are not balanced it effects the market in deficiencies. The market is directly affected by missed societal economic opportunities. Deadweight loss is significant to the market because it refers to how “society’s living standards and overall prosperity” are calculated (Agarwal, 2022). Deadweight loss affects the market by creating “excess burden” to society because this burden is how society’s “pays” for the loss. In the market, supply and demand strive to reach an equilibrium.
Tax incidence is the “division of the tax burden between stakeholders that include the buyers and sellers and/or producers and consumers” (Kagan, 2022). The shifts of supply and demand associated with price elasticity are the major factors that determine tax incidence (Kagan, 2022). It is important to note that price elasticity is directly correlated to how the buyer responses to the movement of price of a particular good or service (Kagan, 2022). In this case, “when supply is more elastic than demand, the tax burden falls on the buyers” and interchangeably, “when demand is more elastic than supply, producers bear the cost of the tax” (Kagan, 2022).
Ultimately, deadweight loss is an indicator that the economy is out of balance, which is caused by an inefficient allocation of resources. This leads to a change in consumer and producer behaviors. It is crucial to monitor deadweight loss from the consumer and producer standpoint to analyze for deficiencies to minimize economic loss.
References
Agarwal, Prateek. (2022, February 2). Deadweight Loss. Intelligent Economist.
Masterclass. (2022, October 12). Deadweight Loss Guide: 7 Causes of Deadweight Loss.
Tuovila, Alicia. (2022, May 25). What Is Deadweight Loss, How It’s Created, and Economic Impact. Investopedia. .
Kagan, Julia. (2022, April 2). Tax Incidence: Definition, Example, and How It Works. Investopedia.
