Deadweight loss occurs when
A) producer surplus is greater than consumer surplus.
B) the maximum level of total welfare is not achieved.
C) consumer surplus is reduced.
D) an inferior good is consumed.

Question

Quizplus · Accepted Answer

Deadweight loss occurs when the maximum level of total welfare is not achieved, which can happen due to market inefficiencies such as taxes, subsidies, price ceilings or floors, and externalities. In these cases, some potential mutually beneficial transactions do not occur, resulting in a loss of welfare to both consumers and producers. Deadweight loss is the difference between the total surplus that would have been generated at the efficient equilibrium and the actual total surplus generated. Option A is incorrect because producer surplus being greater than consumer surplus may not necessarily result in deadweight loss. Option C is partially correct but does not capture the full extent of deadweight loss. Option D is incorrect because the consumption of an inferior good does not necessarily lead to deadweight loss.

Deadweight Loss Occurs When