Deadweight Loss (DWL) is the additional cost borne by the community due to market inefficiency (consumer economic efficiency disappears). DWL occurs when the amount of supply and demand is out of balance (equilibrium), this condition often occurs because of restrictions on the output of a product so that the efficiency of resource allocation is not achieved. Here consumers are willing to pay higher for a product compared to the production costs that have been incurred by the producer, so indirectly the consumer has to pay the costs in an imperfect market.
Even though the manufactured goods supplied by the company are relatively low in value, consumers are still willing to pay a price that should be sufficient to pay for goods of higher quality and value. This will increase consumer demand for circulating products so that it will also indirectly harm the country because producers do not use their resources productively. Deadweight loss can occur due to several things, such as changes in policy in business competition, changes in tax rates and so on which make producers carry out production with limited or limited resources even though consumer demand does not change so that consumers are forced to buy goods of below standard quality at the same price or maybe at a higher price.
Factors causing Deadweight loss
It has been mentioned above regarding the causes of Deadweight loss which makes the market lose its efficiency or its balance point as happens in a perfectly competitive market. Several factors that can cause Deadweight loss include:
1. Changes in policies related to the minimum Wage of workers
Changes in the law that regulates the minimum wage can cause Deadweight loss, if the minimum wage increases, the company must pay higher employee wages so the company must adjust its company budget which may lead to production costs. In addition, with the increase in the minimum wage, companies will also prioritize hiring employees who have higher skills than before so that opportunities for people with lower skills will be difficult to find jobs that match their educational background.
2.There is price control
Price control or often called a price ceiling can also cause Deadweight loss because the production of goods will be hampered thereby reducing the supply of goods/services. In this case, the producers will experience an income deficit because they produce fewer goods and the consumers will also lose, namely it is difficult to get the goods they need. The existence of price control or basic pricing policies by the government causes the base price to be at the equilibrium point, this is what affects supply and demand which causes deadweight loss.
3. Production quota limitation
Quota restrictions are government policies to limit the production of goods by companies. Quota restrictions are basically carried out with the aim of influencing and maintaining the price level. But on the other hand, this policy can also cause a consumer surplus and can shift the point of market equilibrium towards inefficiency.
4.Tax Policy
Actually, tax policy is carried out by the government to maintain economic stability, but taxes can cause deadweight loss because it will tend to reduce purchases of goods made by consumers. Why are consumers reluctant to buy more than usual? because firstly, higher taxes applied to consumers and also producers make consumers only able to spend less money, besides that the price of production goods also increases as a result of taxes imposed on producers also increases even though producers can regulate the price of goods so that they are not so disadvantaged or even benefited .
5.The existence of monopoly and oligopoly
The two types of markets can also cause Deadweight loss because basically these two types of markets eliminate market balance and there has never been an equilibrium between producers and consumers. In a monopoly or oligopoly market, producers can control the supply of goods or services so that they unconsciously increase their prices which in turn will reduce the number of goods or services sold because consumer demand decreases.
Example and How to calculate Deadweight loss
To calculate Deadweight loss, we can use the formula:
Deadweight loss = 1/2 x (Qe-Q1) x (P1-P2)
Information:
P1-P2 : price change from P1 to P2
Q1-Q2 : quantity change from Q1 to Q2
In the economic concept, the term Deadweight Loss (DWL) is a concept that analyzes and explains the occurrence of market situations that do not work efficiently or cause markets disequilibrum.
More comprehensively Deadweght Loss is defined as the incurrence of costs that must be borne by the community due to a situation of market inefficiency that occurs which causes losses in the form of loss of producer surplus and consumer surplus due to misallocation or inefficient allocation of resources or also interpreted as a reduction in consumer surplus and Producer surplus that occurs when the output of a product is limited so that it is lower than the optimum level of efficiency
In another definition, it is said that Deadweight Loss is a reduction in social efficiency that prevents trade whose benefits exceed the costs incurred due to inefficient allocation of resources. The meaning of social efficiency has the same meaning as the net profit for the community from all trades carried out in the market
Characteristics of the occurrence of the Deadweght Loss phenomenon, including:
The phenomenon of deadweight loss contradicts or runs away from the concept of a perfectly competitive market
The occurrence of market inefficiency is characterized by resource allocation inefficiency .
There is a decrease or reduction in consumer surplus and producer surplus
consumers are willing to pay higher to obtain a product/goods compared to the costs required to produce these goods,
Rising levels of demand and production of low-value goods
The state becomes more disadvantaged because its resources are not used in the most productive way.
The emergence of unfair business competition.
The emergence of a policy of limiting the output of a product that is lower than the optimum level of efficiency.
The supply and demand situation is not at equilibrium
Factors that cause Deadweight Loss, including:
Enforcement of the policy of setting a minimum price level on producers (Floor Price)
Enforcement of the policy of setting a price limiting the maximum price level (ceiling price) that producers must comply with.
Production quota policies or production restrictions by the government to limit the amount of production of goods or services sold in the market in order to influence the price level.
The imposition of taxes on products offered to the market makes production costs increase so that the price of a product automatically becomes higher than its basic price.
