Deadweight Loss
The loss of economic efficiency caused by market distortions such as taxes or price controls.
What is Deadweight Loss?
Deadweight loss is the reduction in total economic surplus — the combined benefit to buyers and sellers — that occurs when a market cannot reach a competitive equilibrium. Common causes include taxes, subsidies, price floors, price ceilings, and monopoly pricing. When a tax is imposed, some mutually beneficial transactions no longer occur because the tax-inclusive price is too high for buyers or too low for sellers. The deadweight loss is represented graphically as a triangle between the supply and demand curves outside the new equilibrium. It measures pure inefficiency — value that could theoretically exist but is forfeited due to the market distortion.
Example
A $1 tariff on imported steel raises the domestic price from $10 to $11. At $10, domestic buyers purchased 1,000 tons and importers supplied 400 tons. At $11, buyers purchase only 900 tons. The 100 tons no longer traded represent mutually beneficial exchanges that are now priced out of the market — that foregone surplus is the deadweight loss.
Source: Investopedia — Deadweight Loss