Deadweight loss iimm

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Deadweight loss iimm

  1. 1. DEADWEIGHT LOSS
  2. 2. Consumer Surplus <ul><li>Individual consumer surplus = net gain from the purchase of a good= the difference between the maximum price a consumer is willing to pay for a good and the actual price paid </li></ul><ul><li>Total consumer surplus is the sum of all consumer surpluses gained by all buyers of a good in the market </li></ul>
  3. 3. Consumer surplus = the area above the price and below the demand curve 100 Consumer Surplus 0 P = 35 400 35 D
  4. 4. Consumer Surplus and a Price Increase 100 0 P = 60 400 35 60 Consumer Surplus 270 D
  5. 5. Producer Surplus <ul><li>The seller’s cost: the lowest price a seller is willing to accept for a good: </li></ul><ul><li>Producer surplus: the difference between the (market) price a seller actually receives and his/her (seller’s) cost </li></ul><ul><li>A seller would not sell below his/her cost </li></ul><ul><li>If the market price is below a seller’s cost the seller will leave the market </li></ul>
  6. 6. Producer Surplus and The Market Supply P = 60 0 P 270 Producer Surplus 60 10 S
  7. 7. Total Surplus 60 100 10 D S Consumer Surplus Producer Surplus 0 270
  8. 8. DEADWEIGHT LOSS <ul><li>Changes in Welfare </li></ul><ul><ul><li>A deadweight loss is the fall in total surplus that results from a market distortion, such as government regulations on prices and tax. </li></ul></ul>
  9. 9. Taxes and Consumer and Producer Surplus A C F B K L D S Loss of consumer surplus: A+B Loss of producer surplus: C+F Tax revenue: A + C Deadweight loss: B +F 0 Q 60 100 10 30 90 270 100

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