Working a Profit : Dead Weight Loss Example Any market outcome that provides a solution that reduces the potential of a market to make as much product.

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Working a Profit : Dead Weight Loss Example Any market outcome that provides a solution that reduces the potential of a market to make as much product as possible given the technology available, results in a loss of welfare to the entire economy. Profit is apportion of that loss in welfare that accrues to the private capital controlling agent, while Deadweight Loss is simply lost. The profit after all is subject to taxation and may well be taken away by an enlightened government and redistributed to other members of society. The deadweight loss is not real in monetary terms but may be approached when a government uses industrial policy to restructure markets. Industrial policy includes laws dealing with labor relations, financial integrity, competition policy, and monetary policy. Generally economists use these concepts to evaluate the performance of a market and advise private and public sectors of remedial approaches to these issues. For an economy where demand is given by Pd=100-Q,MR(marginal revenue) is given by MR=100-2Q, and MC(marginal cost) is given by MC=20+2Q, and the government taxation rule is to tax away profits if profits exceed the Dead Weight Loss, would the government intervene?

Diagrammatic Representation Decision Rule is MR=MC Price Quantity Marginal Revenue Demand Marginal Cost Profit Cost Dead Weight Loss Equilibrium Price 73 1/3 Equilibrium Quantity 26 2/

Analyzing the problem At the profit maximizing level of quantity MR=MC => Q=20+2Q=>Q=20 which is the profit maximizing output. This means that the price from the demand curve is =80. The costs at this level are found in the Marginal Cost curve or 20+2(20)=60. The difference between price and costs is the profit per unit sold which is 20 and this is 20 for each of 20 units or a total profit of 20 * 20=400. The Dead Weight Loss is harder to calculate because the triangle is tilted. The preferred approach is to calculate the lost consumer surplus and then the lost producer surplus and add them together. The lost consumer surplus DWL1 is ( )/2 *6.7 = The lost producer surplus DWL2 is ( )/2*6.7= The total DWL is 67. Therefore as profit (400) is greater than DWL (67) the government will intervene and tax away the profits.