To What Extent Should Government Subsidize Higher - amazonia.fiocruz.br

Deadweight lossalso known as excess burdenis a measure of lost economic efficiency when the socially optimal quantity of a good or a service is not produced.

Areas of Interest

Non-optimal production can be caused by monopoly pricing in the case of artificial scarcitya positive or negative externalitya tax or subsidyor a binding price ceiling or price floor such as a minimum wage. 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. The monopolist has "priced them out of the market", even though their benefit exceeds the true cost per nail. Conversely, deadweight loss can also arise from consumers buying more of a product than they otherwise would based on their marginal benefit and the cost of production.

The difference between the cost of production and the purchase price then creates the "deadweight loss" to society.

A tax has the opposite effect of a subsidy. Whereas a subsidy entices consumers to buy a product that would otherwise be too expensive for them in light of their marginal benefit price is lowered to artificially increase demanda Wnat dissuades consumers from a purchase price is increased to artificially lower demand.

This excess burden of taxation represents the lost utility for the consumer.

A common example of this is the so-called sin taxa tax levied against goods deemed harmful to society and individuals. For example, "sin taxes" levied against alcohol and tobacco are intended source artificially lower demand for these goods; some would-be users are priced out of the market, i.

Indirect tax VATweighs on the consumer, is not a cause of loss of surplus for the producer, but affects consumer utility. Harberger's triangle, generally attributed to Arnold Harbergershows the deadweight loss as measured on a supply and demand graph associated with government intervention in a perfect market.

Mechanisms for this intervention include price floorscapstaxes, tariffs, or quotas.

Want to add to the discussion?

It also refers to the deadweight loss created by a government's failure to intervene in a market with externalities. In the case of a government tax, the amount of the tax drives a wedge between what consumers pay and what producers receive, and the area of this wedge shape is equivalent to the deadweight loss caused by the tax. The area represented by the triangle results from the fact that the intersection of the supply and the demand curves are cut short.]