How to calculate deadweight loss
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- Опубликовано: 28 окт 2011
- This video goes over the basic concepts of calculating deadweight loss, and goes through a few examples. More information on this topic is available at www.freeeconhelp.com/2011/10/h...
Deadweight loss occurs when market equilibrium is not equal to efficient equilibrium. This means that the marginal benefit of society is not equal to the marginal cost of society so there is a disconnect between the true benefits and costs. In this case, total surplus is not as large as it could be which means that there is a loss to society. Since this isn't a necessary loss, economists call it a "deadweight" loss meaning that we could easily remove it but nudging markets toward the efficient outcomes.
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Below is a summary of the transcript for the video:
3.450,:10.519
This video is going to go over how to calculate deadweight loss and kind of describe. What Deadweight. Loss is so dead weight Loss
:11.099,:13.099
arises from an
:13.110,:15.110
economy not having the maximum
:15.540,:16.920
Surplus possible
:16.920,:21.860
So if we look at a perfectly competitive model we have our supply and demand lines
:22.259,:26.238
The area above price and below demand is our consumer surplus
:26.759,:28.2
the area
:28.2,:31.189
below price and Above supply is our producer surplus
:32.070,:37.189
So there's no Deadweight loss in this economy because surplus is maximized
:38.670,:46.640
however if we were to institute a tax or there's an externality or something like that, then we would have a
:48.420,:52.070
shift in one of these curves
:53.399,:55.579
Where the Optimum should be?
:56.909,12.869
Here, but instead we're here and so that difference
15.070,18.930
Between where we should be and where we are?
1:10.950,1:16.250
Gives us a Deadweight loss that's occurred in the economy so first What is a deadweight loss?
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What's causing it?
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It's a difference between Marginal cost and marginal benefit
1:23.340,1:29.210
so you'll notice that at our optimum we have marginal cost equally marginal benefit and
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We're good
1:31.530,1:36.559
However if MC prime is our true Marginal cost in the economy
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Then we do not have marginal benefit equal to marginal cost because we want to be here instead of here
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So everywhere between these two curves
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We have a difference between marginal cost and marginal benefit and that creates the deadweight loss
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So let's go through an example
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We're going to begin our economy in equilibrium
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and just to make things easy let's say that the initial equilibrium is 5
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5 so then the government decides it decides that they want to institute a tax and let's call it a supply-side, tax
2:34.060,2:41.399
So that's supply plus t our new equilibrium is going to be at this point and let's just say that
2:44.769,2:47.309
results in a price instead of 6 a
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quantity of 4 and then here this price that the suppliers receive is 4
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so here the quantity of the tax is 2
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The line shifted up by the amount of to the suppliers
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Take half the tax and the consumers take half the tax
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So again remember with Deadweight loss we want to be here
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at a quantity of 5 and a price of 5
3:17.829,3:23.459
but we end up it here at a quantity of 4 price after tax of 6
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our sorry price before tax of 6 and price after tax of 4
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So remember this is our marginal benefit
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This is our marginal cost and this is our marginal cost plus the tax
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So what's going on in the economy is at this point right here?
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We're losing out on Potential Surplus
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Because the true marginal benefit of the economy is still greater than the true marginal cost of the economy
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It's just that the tax
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has
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Taken away that potential because now suppliers have to pay a tax instead of realizing their true gains
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So everywhere between the marginal benefit and marginal cost from this new quantity
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To the old quantity is going to be deadweight Loss
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the neat thing about this is just the area of the triangle and if you remember
Thanks for watching, I hope you found it useful! As always, if you have questions please feel free to add them below and I will do my best to address it.
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97 thousand people have shitty econ professors, and I think you helped all of us. :D
i'm still confused.
my head feels like exploding :)
I have SO much trouble in my economics class and couldn't find the loss because I didn't know you had to subtract the base. Thanks so much!
Awesome, glad it helped!
Really great explanation. My midterms are coming up and I will be back here digging through videos for my micro class.
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wow explanation, after watching this video my concepts are totally clear about dead weight loss.
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Even though you left out key points you taught the concept so well
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Very helpful, Thank you.
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thanks. can you do one with calculus explanation.
Hi can you make a video on how to calculate isoprofit
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0:56 1:42:
Your explanation regarding the tax situation （: If MC’ is our true marginal cost, then deadweight loss exists, because we want to be here (pointing at your new equilibrium) instead of here (pointing at your old equilibrium)）sounds a bit misleading to me.
Although you were right that taxation generates a deadweight loss, your description of the desired equilibrium is incorrect. Tax causes the supply curve to shift toward ( S’=MC’) and thus creates your new equilibrium. Your new equilibrium is where “we are” after taxation, whereas the desired equilibrium point (the allocatively efficient point) is the old one. In other words, the new equilibrium price and quantity are inefficient. (note that this differs from the process of solving the impact of externality on market outcomes.)
3:22: No need for correction. Price after tax: 6; price before tax: 4.
I don't understand how each triangle was chosen. Like why was one of them the left, and the other, the right?
Jason Quach when taking bout divergence and per unit subsidy, the deadweight loss is on the right
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Thankyou Sir!
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How do you know that the tax is split by supplier and buyer?
How did the 7 came up sir explain it quickly
might be a stupid question, but isn't the area of a triangle 1/2*base*perpendicular height meaning that the triangle should include a 90' angle? or does this not apply to calculating deadweight loss?
The equation applies to all triangles.
You may be able to demonstrate this to yourself by drawing a rectangle around any triangle and then filling in the void that is left in the rectangle (eg. area not covered by the triangle) to see that it fills exactly half of the newly drawn rectangle. For example: jeremykun.files.wordpress.com/2011/06/triangle1.png?w=596&h=302
& where is consumer surplus and producer surplus at 4:25 @Free Econ Help
Love you
For people who wants to jump directly to the calculation click 4:00
thanks a lot.;...
Deadweight loss is the loss in consumer and producer surplus. So how is deadweight loss represented in right side for negative externalities? There's no consumer or producer surplus
How do you know the third point is exactly at 4$?... Like I have these datas, what is the DWL: Qd=1200-2p, Qs=p-300, what is the DWL after 15 unit of tax? P=500, Q=200, P*=505, Q*=190, but there is no third P to be able to calculate the triangle's size...
To solve this you need to add the tax to the appropriate function. It would be easiest to solve for the inverse demand (or supply) function and then add the tax to the function. EG. P=600-1/2Qd-15 (because the tax is fifteen and they are willing to pay 15 less for any given Qd). Alternatively, you can add the tax to the Qd function by adding it within the price: eg. Qd=1200-2(p+15).
THANKS
Glad it helped!
How to calculate welfare?
4:29 You’re wrong at this part.Because we’re doing calculation on our triangle. So that’s why our base is 2 and height is 1.
But still it’s a really good video though Thnks :))
You're right
This tells you that no one is perfect
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isn't it the base that is 2 and the height that is one ? i mean it's the same result but it can be very bad to teach someone this.
In this example, the height is 2 and the base is one (6-4) and (5-4) respectively, it's possible you learned it differently some where else.
+Free Econ Help why isn't the base 2units (6-4) and the height 1unit (5-4)?
+Stefan CZ
High on potenus. I think it looks alot nicer if you use the hypotenuse as the base.
Make videos on micro economics which mathematically proved
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upwards shift?! 0:52
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get to the point! so slow
For the love of god, put a pop filter on your microphone. The very least you could do is filter out unwanted noise in a program like Audacity.
Talk faster
Did not like this explanation. Prefer a more mathematical and logical approach.
Sorry you didn't like it, I hope you find what you need!
Thanks bro