Difference between revisions of "Deadweight loss"
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'''Deadweight loss''' is an [[economic]] loss to the public without any offsetting gain. | '''Deadweight loss''' is an [[economic]] loss to the public without any offsetting gain. | ||
| − | Specifically, a [[deadweight]] loss is the loss in [[efficiency]] that a society suffers as a result of firms setting their [[monopoly]] prices greater than [[marginal cost]] (P > MC). The deadweight loss is due to the loss in value to society of output not produced. | + | Specifically, a [[deadweight]] loss is the loss in [[efficiency]] that a society suffers as a result of firms setting their [[monopoly]] prices greater than [[marginal cost]] (P > MC). |
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| + | The loss represents the extra value that consumers obtain goods and services that is worth more to them than the price they paid. For example, you may buy lunch for $10 but you may be so hungry that it is really worth $15 to you. If the price of that lunch were raised by a monopoly to $16, then you wouldn't buy the lunch and your individual "deadweight loss" from that monopoly price would be $5 compared to the free market. | ||
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| + | In other words, the deadweight loss is due to the loss in value to society of output not produced. | ||
[[Category:Economics]] | [[Category:Economics]] | ||
Revision as of 15:10, June 9, 2009
Deadweight loss is an economic loss to the public without any offsetting gain.
Specifically, a deadweight loss is the loss in efficiency that a society suffers as a result of firms setting their monopoly prices greater than marginal cost (P > MC).
The loss represents the extra value that consumers obtain goods and services that is worth more to them than the price they paid. For example, you may buy lunch for $10 but you may be so hungry that it is really worth $15 to you. If the price of that lunch were raised by a monopoly to $16, then you wouldn't buy the lunch and your individual "deadweight loss" from that monopoly price would be $5 compared to the free market.
In other words, the deadweight loss is due to the loss in value to society of output not produced.