Today's Question
Deadweight loss represents economic value DESTROYED - trades that would benefit both buyer and seller but don't happen due to market distortions. Taxes, price controls, and monopolies all create deadweight loss. If a tax makes a coffee cost $5 instead of $4, and some people who valued coffee at $4.50 now don't buy it, why is this a 'loss' to society?
Model Answer
Those coffee buyers valued it at $4.50. Sellers could profitably provide it at $4. The trade would create $0.50 in total surplus (both sides gain). But the tax blocks the trade - the buyer won't pay $5 for something worth $4.50 to them. That $0.50 in potential value simply vanishes. It's not transferred to anyone (unlike the tax revenue itself) - it's destroyed. Multiply by millions of blocked trades, and you get significant welfare losses.