Deadweight loss

Deadweight loss is the reduction in total economic surplus caused when a market outcome prevents mutually beneficial trades or misallocates resources. It is not transferred to another participant; it disappears from the gains available to society.

Consumer surplus: The difference between what buyers are willing to pay and what they actually pay. Lost trades can remove gains buyers would otherwise receive.
Tax wedge: The gap between the price buyers pay and the price sellers receive because of a tax. The wedge drives apart buyers' and sellers' incentives, reducing mutually beneficial exchange.
Economic surplus: The combined gains to buyers and sellers from economic activity, often measured as consumer plus producer surplus. Deadweight loss is the portion of potential surplus that an outcome fails to realize.
Economic rent: A payment to a factor of production above the minimum required to keep it in its current use. Rent reallocates gains to a recipient; unlike deadweight loss, it need not destroy surplus.
Producer surplus: The difference between the price sellers receive and the minimum they would accept. Lost trades can remove gains sellers would otherwise receive.
Monopoly: A market structure in which one seller supplies a product without close substitutes. A monopolist can restrict output below the level that maximizes total surplus.
Pareto efficiency: An allocation is Pareto efficient when no one can be made better off without making someone else worse off. Foregone mutually beneficial trades indicate an avoidable failure of this efficiency criterion.
Laffer curve: A curve showing the relationship between a tax rate and the tax revenue it raises. Revenue changes are transfers to government, while deadweight loss measures lost total surplus.
Marginal benefit: The additional benefit from consuming or producing one more unit. Efficient trade continues while marginal benefit exceeds marginal cost.
Negative externality: A cost imposed on people outside a transaction and not reflected in its market price. Unpriced external costs can make market output exceed the socially efficient quantity.

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