DEADWEIGHT LOSS

It is the cost that a society created in a market inefficiency. It is used in economics or deadweight loss and it can be applied by any deficiency allocation of resources. Price ceiling, price floors and taxations are all said to create deadweight losses. Deadweight loss occurs when supply and demand are not in equilibrium. Minimum wage and living wage laws can create a deadweight loss by causing employers to overpay for employees and preventing low-skilled workers from securing jobs. Price ceilings and rent controls can also create deadweight losses by discouraging production and decreasing the supply of goods, services or housing below what consumers truly demand. Consumers experience shortages and producers earn less than they would otherwise. Taxes are also said to create a deadweight loss because they prevent people from engaging in purchases they would otherwise make because the final price of the product will be above the equilibrium market price.

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