Dead weight loss

In economics, a deadweight loss is a permanent loss of well being to society that can occur when equilibrium for a good or service is not Pareto optimal, (that at least one individual could be made better off without others being made worse off). Deadweight loss can be thought of destroying a given quantity of a good or service in question, and in many cases natural waste in a system (like leakage from water pipes) is equivalent to and is also called deadweight loss.

Deadweight loss can be caused by monopoly pricing (or even pricing in markets with high fixed costs), externalities or taxes or subsidies. The term deadweight loss may also be referred to as the 'excess burden of monopoly' or 'taxation'.

In circumstances of perfectly elastic or perfectly inelastic demand or supply, it can be shown that the dead weight loss in these circumstances is 0. This is an important consideration if government's goal is to increase revenue instead of maximizing social welfare. Furthermore, the dead weight loss usually increases exponentially with regards to the size of the tax in question, meaning a small widely spread (among a wide variety of goods and services) tax is less harmful overall then a large tax on few goods.