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    Deadweight Welfare Loss

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    api-3825580
    Deadweight welfare loss refers to the loss of economic efficiency that can occur due to market distortions such as monopoly power, taxes, and trade protectionism. Specifically: 1) A monopoly produces less than the socially optimal quantity, creating a deadweight loss triangle between the monopoly and competitive outputs. 2) An indirect tax leads firms to produce at a higher, tax-inclusive price, creating a deadweight loss triangle between the pre-tax and post-tax quantities. 3) An import tariff creates a similar deadweight loss, with domestic consumers paying a higher price and domestic production exceeding the free-trade level. The net loss from a tariff is represented by the areas of two triangles.

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    Deadweight Welfare Loss

    Uploaded by

    api-3825580
    5K views26 pages
    Deadweight welfare loss refers to the loss of economic efficiency that can occur due to market distortions such as monopoly power, taxes, and trade protectionism. Specifically: 1) A monopoly produces less than the socially optimal quantity, creating a deadweight loss triangle between the monopoly and competitive outputs. 2) An indirect tax leads firms to produce at a higher, tax-inclusive price, creating a deadweight loss triangle between the pre-tax and post-tax quantities. 3) An import tariff creates a similar deadweight loss, with domestic consumers paying a higher price and domestic production exceeding the free-trade level. The net loss from a tariff is represented by the areas of two triangles.

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    Deadweight welfare loss refers to the loss of economic efficiency that can occur due to market distortions such as monopoly power, taxes, and trade protectionism. Specifically: 1) A monopoly produces less than the socially optimal quantity, creating a deadweight loss triangle between the monopoly and competitive outputs. 2) An indirect tax leads firms to produce at a higher, tax-inclusive price, creating a deadweight loss triangle between the pre-tax and post-tax quantities. 3) An import tariff creates a similar deadweight loss, with domestic consumers paying a higher price and domestic production exceeding the free-trade level. The net loss from a tariff is represented by the areas of two triangles.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as ppt, pdf, or txt
    5K views26 pages

    Deadweight Welfare Loss

    Uploaded by

    api-3825580
    Deadweight welfare loss refers to the loss of economic efficiency that can occur due to market distortions such as monopoly power, taxes, and trade protectionism. Specifically: 1) A monopoly produces less than the socially optimal quantity, creating a deadweight loss triangle between the monopoly and competitive outputs. 2) An indirect tax leads firms to produce at a higher, tax-inclusive price, creating a deadweight loss triangle between the pre-tax and post-tax quantities. 3) An import tariff creates a similar deadweight loss, with domestic consumers paying a higher price and domestic production exceeding the free-trade level. The net loss from a tariff is represented by the areas of two triangles.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
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    Download as ppt, pdf, or txt
    of 26

    Deadweight

    Welfare Loss
    Deadweight welfare loss

    Maximum total
    surplus under
    perfect competition
    Maximum total surplus under perfect competition
    £

    MC

    Pe

    D = MU

    O
    Qe Q
    Maximum total surplus under perfect competition
    £

    MC

    Pe
    B

    D = MU
    C
    O
    Qe Q
    Deadweight welfare loss

    Deadweight
    welfare loss
    under monopoly
    A monopolist producing less than the social optimum
    £
    MC

    P1

    MC1
    AR
    MR
    O Q1 Q
    Monopoly output
    A monopolist producing less than the social optimum
    £
    MC = MSC

    P1

    P2 = MSB
    = MSC

    MC1
    AR = MSB
    MR
    O Q1 Q2 Q
    Monopoly output Perfectly competitive output
    Deadweight loss under monopoly
    £ MC
    (= S under perfect competition)

    Consumer
    surplus
    a
    Ppc
    Producer
    surplus

    AR = D
    O Qpc Q
    (a) Industry equilibrium under perfect competition
    Deadweight loss under monopoly
    £ MC
    (= S under perfect competition)

    Deadweight
    Consumer welfare loss
    surplus b
    Pm

    Ppc Producer a
    surplus

    MR AR = D
    O Qpc Qpc Q
    (b) Industry equilibrium under monopoly
    Deadweight loss under monopoly
    £ MC
    (= S under perfect competition)
    Perfect
    competition

    Consumer
    surplus
    a
    Ppc
    Producer
    surplus

    AR = D
    O Qpc Q
    (a) Industry equilibrium under perfect competition
    Deadweight loss under monopoly
    £ MC
    (= S under perfect competition)
    Monopoly

    Deadweight
    Consumer welfare loss
    surplus b
    Pm

    Ppc Producer a
    surplus

    MR AR = D
    O Qpc Qpc Q
    (b) Industry equilibrium under monopoly
    Deadweight welfare loss

    Deadweight
    welfare loss
    from an indirect tax
    Deadweight loss from an indirect tax
    £

    Before-tax
    situation S

    P1

    O Q1 Q
    Deadweight loss from an indirect tax
    £

    Before-tax
    situation S

    Consumer
    surplus
    P1

    O Q1 Q
    Deadweight loss from an indirect tax
    £

    Before-tax
    situation S

    Consumer
    surplus
    P1

    Producer
    surplus
    D

    O Q1 Q
    Deadweight loss from an indirect tax
    £
    S + tax

    P2

    P1

    P2 − tax

    O Q2 Q1 Q
    Deadweight loss from an indirect tax
    £
    S + tax

    1
    P2
    2 3
    P1
    4 5
    P2 − tax

    6
    D

    O Q2 Q1 Q
    Deadweight loss from an indirect tax
    £
    S + tax

    1
    P2
    2 3
    P1
    4 5
    P2 − tax

    6
    D

    O Q2 Q1 Q
    Deadweight loss from an indirect tax
    £
    S + tax

    1
    P2
    2 3
    P1
    4 5
    P2 − tax

    6
    D

    O Q2 Q1 Q
    Deadweight loss from an indirect tax
    £
    S + tax
    Tax revenue
    for government
    S

    1
    P2
    2 3
    P1
    4 5
    P2 − tax

    6
    D

    O Q2 Q1 Q
    Deadweight loss from an indirect tax
    £
    S + tax
    Deadweight
    loss from tax
    S

    1
    P2
    2 3
    P1
    4 5
    P2 − tax

    6
    D

    O Q2 Q1 Q
    Deadweight welfare loss

    Deadweight
    welfare loss
    from protection
    The cost of protection
    P
    Sdom (=MC)

    PW S world

    Ddom
    O Q1 Q2 Q
    The cost of protection
    P
    Area edbc equals loss Sdom (=MC)
    a
    of consumer surplus

    PW + t e d
    S world + tariff
    Tariff c b
    PW S world

    Ddom
    O Q1 Q3 Q4 Q2 Q
    The cost of protection
    P
    Sdom (=MC)
    a Area 1 equals gain in
    producer surplus

    Area 3 equals gain


    in tariff revenue

    PW + t e d
    S world + tariff
    Tariff c 1 2 3 4 b
    PW S world

    Ddom
    O Q1 Q3 Q4 Q2 Q
    The cost of protection
    P
    Sdom (=MC)
    a Areas 2 + 4
    equals
    net loss

    PW + t e d
    S world + tariff
    Tariff c 1 2 3 4 b
    PW S world

    Ddom
    O Q1 Q3 Q4 Q2 Q

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