Deadweight Loss
Plain definition
Deadweight loss is the value of mutually beneficial trades that do not happen because quantity traded deviates from the efficient level. It is the total surplus — consumer plus producer — destroyed by a tax, price control, monopoly, or externality, gained by nobody.
In economics
Deadweight loss is the welfare cost of market distortions, shown as the familiar triangle between the supply and demand curves. Its size grows with the elasticities of supply and demand and with the square of the tax or price distortion — which is why small taxes are cheap and large ones disproportionately costly.
Example
A 20-rupee-per-unit tax on a good cuts quantity from 1,000 to 800. The 200 lost trades — each valued by buyers above sellers' cost — vanish entirely: the government collects revenue on the 800 units, but the surplus on the missing 200 is deadweight loss, benefiting no one.
The crucial point many miss: deadweight loss is not transferred to anyone. Tax revenue goes to the government, and consumer surplus lost to a price rise goes to sellers — but deadweight loss is surplus that simply evaporates. Calling the tax revenue itself deadweight loss is the most common error; revenue is a transfer, the lost trades are the loss.