Deadweight Losses

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Libertarians love to complain about deadweight losses due to taxation, and frequently exaggerate their size visually by drawing large Harberger's triangles. But plenty of market activities also cause deadweight losses. And deadweight losses can be offset many times over by the actions government can take with tax money.

Some market causes of deadweight losses:

  • holdout problems (some estimates as high as 10% GDP)
  • unemployment
  • market power due to monopoly or oligopoly
  • mark-up pricing (aka fixpricing)
  • financial sector profits
  • interchange fees for credit cards
  • externalities
  • positional goods

There are also good reasons to doubt the premises of deadweight losses, which are rooted in the premises of neoclassical economics (Economics 101.) Like the stories that minimum wages should greatly reduce employment, stories about deadweight losses are seldom backed by actual data.


Mark-up Prices (2 links)
The widespread real-world use of mark-up prices, also known as administered prices, contradict the assumptions of marginalist theory of prices and many DSGE models based on marginal costs.
Market Power (14 links)
In a market exchange, there is producer surplus and consumer surplus. Market power is a market failure that occurs when producers can raise prices above the marginal costs to capture more of the surplus. Usually through monopoly, oligopoly or other bottleneck techniques. Libertarians often deny the existence of market power.
Positional Goods
Positional goods are a zero sum game, and the more who participate in the game the more wasteful it gets. Luxury taxes can redistribute part of the wasted wealth to better purposes which are not zero sum.
Removing deadweight loss from economic discourse on income taxation and public spending [More...]
When analyzing taxation and public spending, the one-sided concepts of inefficiency, deadweight loss, and distortion bias the discussion. Optimal income taxation maximises aggregate net (after tax) income.
NEW 10/03/2019: The Cost of America’s Oligopoly Problem [More...]
An innovative new study finds substantial, increasing deadweight losses resulting from oligopolistic behavior and points to the important role that startup acquisitions—particularly by large tech firms—played in driving this trend.
The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives (book) (1 link)
"Usually, private ownership creates wealth, but too much ownership has the opposite effect -- it creates gridlock. When too many people own pieces of one thing, whether a physical or intellectual resource, cooperation breaks down, wealth disappears, and everybody loses."
Too much stuff: the deadweight loss from overconsumption [More...]
Deadweight loss can be due to overconsumption. "Overconsumption is pervasive. It happens when there are negative externalities, and market participants do not take into account the full social cost of their production and consumption decisions."
What’s the Dead Weight Loss of a Consumption Tax When Externalities Are Present? [More...]
When negative externalities exist, the marginal social benefit and marginal private benefit (i.e., demand) curves do not overlap because the externality produces a social cost. A tax can fully internalize the externality at zero deadweight loss.
Worst-case deadweight loss: Theory and disturbing real-world implications [More...]
The deadweight loss from a monopolist’s not producing at all can be much greater than from charging too high a price. The column argues that the potential for this sort of deadweight loss is greatest when the market demand curve has a particular (Zipf) shape. Calibrations based on the world distribution of income generate this shape, with disturbing consequences for potential deadweight loss in global markets.


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