Why is it important to review the concept of deadweight losses when looking at consumer or product surpluses?

1 Answer
Aug 31, 2015

Deadweight Loss (DWL) is at the crux of the notion of efficiency in economics.


Economists view efficiency in a very technical manner. An outcome is efficient if and only if it maximizes the sum of producer surplus (PS) and consumer surplus (CS). Only in this case can we be sure that we can make no individual better off without making at least one other individual worse off -- as measured by the concept of surplus (PS and CS).

It's worth noting that DWL occurs (and we can observe it, somewhat) as a reduction in quantity from the optimum quantity achieved by equilibrium. Of course, this line of thought rests on all the assumptions necessary for perfectly competitive markets. These assumptions almost never (maybe, absolutely never?) hold in reality.

The whole notion of efficiency rests on a utilitarian concept. Even when we are focused on positive (empirical) analysis, we can't really escape the normative consequences of this framework. Still, we do not need to think of efficiency as a normative requirement, as difficult as that might sound.