Enter Q1, Q2, P1, and P2 into this deadweight loss calculator to estimate the deadweight loss (DWL) from a market distortion. For this calculator, P1 and P2 should be read from the supply and demand curves at Q1 (they are not necessarily the observed market price).
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Deadweight loss formula
DWL = 1/2 * |Q2-Q1| * |P2-P1|
- DWL is the deadweight loss (loss of total surplus)
- Q1 is the quantity actually produced/traded under the distortion (e.g., with a tax, price control, monopoly, etc.)
- Q2 is the efficient/competitive equilibrium quantity (the quantity that would be traded without the distortion)
- P1 is the supply price (marginal cost) at Q1, read from the supply curve
- P2 is the demand price (willingness to pay) at Q1, read from the demand curve
Deadweight Loss Definition
Deadweight loss is the reduction in total surplus (consumer surplus plus producer surplus) that occurs when a market outcome is not at the efficient quantity (for example, due to taxes, subsidies, price controls, externalities, or market power).
How to calculate deadweight loss?
How to calculate deadweight loss?
- First, determine Q1 and Q2.
Find the quantity actually produced/traded under the distortion (Q1) and the efficient/competitive equilibrium quantity (Q2).
- Next, determine P1 and P2 at Q1.
From the supply and demand curves at Q1, find P1 (supply price/marginal cost) and P2 (demand price/willingness to pay).
- Finally, calculate the deadweight loss.
Use DWL = 1/2 × |Q2 − Q1| × |P2 − P1| to compute the DWL (triangle area).
FAQ
Deadweight loss is the reduction in total surplus (consumer surplus plus producer surplus) that occurs when a market outcome is not at the efficient quantity (for example, due to taxes, subsidies, price controls, externalities, or market power).
