Deadweight Loss

Deadweight loss refers to the inefficiency that occurs when a market doesn't operate at its optimal point, leading to lost economic value. It happens when resources aren't allocated in the most beneficial way, often due to factors like taxes, price controls, or monopolies. For example, a tax on cigarettes might reduce consumption, but it also discourages some people from buying or selling, resulting in fewer transactions and overall economic activity. This lost value — the trades that would have happened without interference — represents deadweight loss, diminishing total societal welfare.