how deadweight loss is created
minimum wage and living wage laws can create a deadweight loss by causing employers to overpay for employees and preventing low skilled workers from securing jobs price ceilings and rent controls can also create deadweight loss by discouraging production and decreasing the supply of goods services or housing below what consumers truly demand consumers experience shortages and producers earn less than they would otherwise taxes also create a deadweight loss because they prevent people from engaging in purchases they would otherwise make because the final price of the product is above the equilibrium market price if taxes on an item rise the burden is often split between the producer and the consumer leading to the producer receiving less profit from the item and the customer paying a higher price this results in lower consumption of the item than previously which reduces the overall benefits the consumer market could have received while simultaneously reducing the benefit the company may see in regard to profits monopolies and oligopolies also lead to deadweight loss as they remove the aspects of a perfect market in which fair competition accurately sets a price monopolies and oligopolies can control supply for a specific good or service thereby falsely increasing its price this would eventually lead to a lower amount of goods and services sold example of deadweight lossa new sandwich shop opens in your neighborhood selling a sandwich for 10 you perceive the value of this sandwich to be 12 and therefore are happy to pay 10 for it now assume the government imposes a new sales tax on food items which raises the cost of the sandwich to 15 at 15 you feel that the sandwich is overvalued and believe that the new cost is not a fair price and therefore are not willing to buy the sandwich at 15 many consumers but not all feel this way about the sandwich and the sandwich shop sees a decrease in demand for its sandwich and a decline in revenues the deadweight loss in this example is the unsold sandwiches as a result of the new 15 cost if the decrease in demand is severe enough the sandwich shop could go out of business further increasing the negative economic effects of the new tax on society at large 