Examples of Deadweight Loss Calculation

1. Examples of Deadweight Loss Calculation Operational Definitions: Total Surplus is the amount of other goods and services traded away to have amarket in a particular good. It is the sum of the Consumer Surplus and the Business Surplus. Consumer Surplus is triangular area from the reservation price (the intercept a is the demand curve Px=a-b Qx) to the equilibrium or market price : market quantity from the origin. Business Surplus is the Producer Surplus plus the Supplier surplus and is the rectangular area from the origin to the market price, market quantity. (usually equal to Total Revenue) Producer Surplus is the area from the market entry point price to the market price to the market price : market quantity equilibrium. Supplier Surplus is Business Surplus minus Producer Surplus. Deadweight Loss is the loss to Consumer Surplus plus the loss to Producer Surplus that is due to a tax or subsidy . (No consideration is given to suppliers who are assumed to shift elsewhere.) Government revenue is the individual tax level in pricing terms times the quantity that clears the market after the restriction has been added. Deadweight Loss is welfare reducing if the Government Revenue is less than the Deadweight Loss

2. Graphics • A Tax Price Reservation Price e Market Price: Market Quantity Price with tax Supply: Ps= c + d Qx Market Price Price business receives with tax f Demand: Px=a – b Qx Market Entry Point Price Origin Quantity Market Quantity Quantity with tax