Deadweight Loss Formula & Calculator

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Deadweight Loss Calculator

Deadweight Loss Calculator

What is Deadweight Loss?

Deadweight loss refers to the reduction in total economic welfare that occurs when a market is not operating at its optimal equilibrium. This inefficiency arises due to factors such as taxes, subsidies, monopolies, or government-imposed price controls (e.g., price ceilings or floors).

In a perfectly competitive market, total welfare is maximized when supply equals demand. However, when external factors shift prices or quantities away from this balance, both consumer and producer surpluses are reduced. The area of lost welfare is represented graphically as a triangle on a supply-demand curve and can be calculated using the formula:

Deadweight Loss Formula:

DWL = (1/2) × (P₂ - P₁) × (Q₁ - Q₂)

This formula calculates the area of the triangular region that represents the inefficiency caused by a deviation from the optimal market equilibrium.

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How to Use the Deadweight Loss Calculator

Step-by-Step Instructions:

Step 1: Enter the original price of the good or service in the “Original Price (P₁)” field. This represents the equilibrium price before any external influence.
Step 2: Input the new price after external factors have altered the market in the “New Price (P₂)” field.
Step 3: Fill in the “Original Quantity (Q₁)” field with the equilibrium quantity sold before any changes occurred.
Step 4: Enter the new quantity sold after market changes in the “New Quantity (Q₂)” field.
Step 5: Click on the “Calculate Deadweight Loss” button. The tool will compute the deadweight loss using the provided formula and display both the result and an explanation of its significance.

This calculator is ideal for economists, students, and policymakers who want to understand how market interventions impact overall economic efficiency.

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