When a consumer fails to purchase something because of the price change, it’s because of the deadweight loss. If you know how to calculate deadweight loss, you will be able to know the amount of your loss because of tax or price changes. However, it changes depending on different industries and their expenses.

Deadweight loss is born because of market inefficiency. Floor Price, ceilings price or taxation, all can cause deadweight loss. It is important to determine the price difference and the quantity difference in order to calculate the deadweight loss.

The quantity difference and the price difference are important in order to calculate the deadweight loss. The following formula can be considered for calculating deadweight loss.

Deadweight Loss = ½ * {(Pn – Po) * (Qo – Qn)}

Here, Pn is the product’s new price, let’s say after adding the tax. Po is the original price of the product. Hence, Pn – Po is the difference in the price. Similarly, Qo is the original quantity that a consumer wants to buy before adding the price. Qn is the new quantity a consumer wants to buy after adding the price. Obviously, that’s smaller than the original price.

Step 1: First of all, get the original price of the service or product.

Step 2: Get the new price of the product or service

Step 3: Deduct the older (original) price of the product or service from newer price

Step 4: Now get the original quantity requested from the consumer

Step 5: Do not forget to determine the newer quantity of the product or service

Step 6: Deduct the newer quantity from the older quantity this time

Step 7: Multiply the difference of the price and the difference of the quantity

Step 8: Divide the result by 2 or multiply it by ½

Check the image at the top for calculating deadweight loss via excel. Here, A2 is Pn, B2 is Po, C2 is Qo, and D2 is Qn. At the cell of E2, the deadweight loss is calculated using the formula. Check the top right of the screenshot for the formula implementation in excel.

A2 – B2 is just Pn – Po, which shows the difference between the prices. C2 – D2 determines the difference between the quantities. Finally, the differences are multiplied and half of the result is the actual deadweight loss. You can check Educba for more excel examples.

Before calculating a deadweight loss, you must know the answer to what is a deadweight loss. Deadweight loss is when the economic equilibrium outcome cannot be achieved because of market inefficiency.

During a deadweight loss, some parties get benefitted and some do not. When the price of something is not justified by the value it provides, the consumer will not purchase that product. Hence deadweight loss occurs. Detailed information about deadweight loss can be found at Study.com.

There are three prominent causes that are responsible for a deadweight loss to happen. They are described below:-

• Taxes: Tax is the unavoidable cause of deadweight loss. When the government adds a financial charge on a product, the price of the item increases, hence deadweight loss happens. The charge is not controllable by the manufacturer nor the consumer, so it cannot be avoided.
• Price floors: When the government sets a limit for the least price of a product or service, it is called the price floor. For example, the government often sets the minimum wages of day laborers. It is often beneficial for either the manufacturers or the consumers.
• Price ceilings: The last cause, price ceilings is also created by the government. Actually, this is the opposite of price floors. In this case, the government sets the highest rate of a product a company can charge. The manufacturer or the service provider cannot charge more than the price ceiling set by the government.

Here are a few examples of deadweight loss that will help you understand the concept. If you can understand the examples, you will understand the concept of deadweight loss.

Example 1

Let’s say you are on a vacation and want to visit someplace. You can go there by airplane, bus, ship, etc. Your boss has issued a bank cheque of \$350 so that you can buy a plane ticket. You went to the airport and saw that they charged \$200 for a ticket. In this case, the value of the trip is greater than the cost, and your net value is \$150 (\$350 – \$200).

Now when you actually went to buy the ticket, you notice that the government has imposed 100% tax on the price of the ticket. Now the price of the ticket has become \$400 and you can’t buy the ticket anymore. You would rather choose a ship or a bus for traveling, depending on whatever provides you the better value.

Example 2

Think of a condition where you have decided to go to a concert. You think that the concert will provide you a value of \$100. The ticket price of the concert is \$80. The price is fine for now and you don’t have an issue with it. You are receiving the net value of \$20. There should be no deadweight loss.

But if the government asks for a 50% tax on the ticket, the price would be \$120. Now it’s clearly your loss as you are not going to receive enough value from the concert. Instead of receiving \$20 worth of net value, you lose \$20. Then you change the decision of going to the concert. The value of the concert ticket is going to be the deadweight loss in this case.

For more examples, you can visit Corporate Financial Institute.

How to Calculate Formal Charge?

If you want to keep track of an electron and want to predict and establish the reactivity, you need to know the formal charge. The formal charge helps to determine if an atom is neutral, positive, or negative. In order to get this, you need to use a formula.

Formal charge = [# of valence electrons] – [electrons in lone pairs + Half of the bonding electrons]

Here, first, you have to determine the number of valence electrons. Then get the electrons in lone pairs and add them to half of the bonding electrons. Deduct the result from the valence electrons and you will get the formal charge.

For example, for calculating the formal charge of the nitrogen atoms in NH4+, you need to place the electron values as below:-

Formal Charge of the nitrogen atoms = (5 valence e-) − (0 lone pair e-) − (8 bond pair e- / 2)

The result is 1+, which assures that the formal charge is positive after calculating it by the formula.

Again for the hydrogen atoms, the formula show be applied like this:-

Formal Charge of the hydrogen atoms = (1 valence e-) − (0 lone pair e-) − (2 bond pair e- / 2)

The answer is 0, which means that the formal charge of the hydrogen atoms is neutral.

Conclusion

If you have read the article attentively, I hope that you now understand deadweight loss and are able to calculate it. This article has demonstrated how to calculate deadweight loss in the easiest way so that everyone can understand it. Wish you good luck and don’t forget to bookmark this page in case you need to go through it one more time.

Different Uses and Applications of organic chemistry

The uses and applications of organic chemistry range from life-saving pharmaceutical discoveries to the vibrant colors of fruits and vegetables we see daily. In this

Ace organic chemistry- tips and tricks, cheat sheets, summary

Mastering organic chemistry takes time and practice. It might seem a daunting task at once if the right approach is not adopted. But in our

Named reactions of organic chemistry- an overview

This article on organic reactions is a special one in our organic chemistry series. It will guide you through how chemical transformations unlock diversity at

Organic Spectroscopy

Organic spectroscopy can be used to identify and investigate organic molecules. It deals with the interaction between electromagnetic radiation (EMR) and matter. These waves travel