Definition
Deadweight Loss
Economic value destroyed when a transaction that both parties would have preferred does not occur.
Definition
Economic value destroyed when a transaction that both parties would have preferred does not occur.
Why It Matters
Taxes, price controls, and monopoly pricing all create deadweight loss — trades that would have made both buyer and seller better off but do not happen because of the distortion.
Policy Example
A minimum wage above the market wage creates deadweight loss if some workers who would have accepted lower wages (and employers who would have hired at that wage) do not transact. The DWL represents the surplus from those would-be trades that never happened.
In Context