Deadweight loss

In economics, deadweight loss is the difference in production and consumption of any given product or service including government tax. The presence of deadweight loss is most commonly identified when the quantity produced relative to the amount consumed differs in regards to the optimal concentration of surplus. This difference in the amount reflects the quantity that is not being utilized or consumed and thus resulting in a loss. This "deadweight loss" is therefore attributed to both producers and consumers because neither one of them benefits from the surplus of the overall production. Deadweight loss can also be a measure of lost economic efficiency when the socially optimal quantity of a good or a service is not produced. Non-optimal production can be caused by monopoly pricing in the case of artificial scarcity, a positive or negative externality, a tax or subsidy, or a binding price ceiling or price floor such as a minimum wage. Assume a market for nails where the cost of each nail is $0.10. Demand decreases linearly; there is a high demand for free nails and zero demand for nails at a price per nail of$1.10 or higher. The price of $0.10 per nail represents the point of economic equilibrium in a competitive market. If market conditions are perfect competition, producers would charge a price of$0.10, and every customer whose marginal benefit exceeds $0.10 would buy a nail. A monopoly producer of this product would typically charge whatever price will yield the greatest profit for themselves, regardless of lost efficiency for the economy as a whole. In this example, the monopoly producer charges$0.60 per nail, thus excluding every customer from the market with a marginal benefit less than $0.60. The deadweight loss due to monopoly pricing would then be the economic benefit foregone by customers with a marginal benefit of between$0.10 and $0.60 per nail. The monopolist has "priced them out of the market", even though their benefit exceeds the true cost per nail.