Loss of welfare

Also known as: Deadweight loss, allocation loss, tax wedge, Harberger triangle

Der Begriff Wohlfahrtsverlust (auch als Nettowohlfahrtsverlust oder Allokationsverlust bekannt) stammt aus der Volkswirtschaftslehre und steht für den Teil der Konsumenten- und Producer surplus, welcher bedingt durch Marktstörungen (z.B. Steuern oder Monopole) nicht mehr verwirklicht werden kann.

Definition / explanation

A welfare loss arises when the amount of goods produced differs from the optimal amount (Pareto-optimal). In that case the equilibrium in the competitive market is disturbed.

Loss of welfare

example - For example, bakers as manufacturers offer their bread to other bread sellers as end consumers. For an efficient equilibrium in the market between supply and demand, a quantity of 25 loaves at a price of EUR 2.50 would be optimal. A state tax is now being introduced, whereby every baker has to pay 0.30 EUR to the state.

Das hat zur Folge, dass der Bäcker die 0,30 EUR auf den ursprünglichen Preis draufschlagen wird und sich so die gesamte Supply curve verschiebt. Die Verbraucher müssen einen höheren Preis zahlen (bis hin zum Höchstpreis). Im Ergebnis sinkt sowohl die Consumer surplus, as well as the Producer surplus and with it welfare as a whole.

Calculate welfare loss

Theoretically, welfare losses can be calculated using taxes, duties and prices as well Monopoly formation included in the calculation.
The following formula is used for the calculation:

  • Draw the supply and demand graphs
  • Calculating prices and demand in an efficient market
  • If the supply remains the same, calculate the new prices and demand (taxes previously added or efficiency reduction occurred)

Calculating the welfare loss using the equation

Wv = 0.5 * (price change * changed demand)

If the price rises by 100 units and the demand falls by 50 units, the equation would look like this:

Wv = 0.5 * (100 * 50)
Wv = 0.5 * 5,000
Wv = 2,500

This is the area of the triangle which is from Offer graphs and the Demand graph as well as the line of new demand is formed.

Summary

  • the welfare loss is an allocation loss
  • the part of the consumer and producer surplus which cannot be realized
  • occurs when there is a price difference between buyer and seller (caused by taxes or market disruptions)
  • The amount of goods produced deviates from the optimal amount
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