Question

1.) Deadweight loss is an important tool for describing the consequences of market failures and government interventions that distort competitive markets that would have otherwise functioned well. Explain what deadweight loss measures (conceptually, what does deadweight loss represent?), and how its numeric value is interpreted (e.g., if there is deadweight loss of $10 million in a particular market, what does this mean?).

2.) A particular nonprofit organization provides after-school tutoring to children from single-parent households. This organization currently employs 190 teachers, who are paid $32 per hour and have a marginal product of 72 (representing their students’ achievement gains). It also employs 285 classroom assistants, who are paid $16 per hour and have a marginal product of 48. Explain how the organization can increase its output (generate additional achievement gains for its students) without increasing its costs.3.

Answer 1

1)Deadweight loss measures the loss in the amount of surplus that is transfered to none in the event of a price control. It measures the loss in economic efficiency when a good or a service is not produced at the socially optimal quantity. If there is deadweight loss of $10 million in a particular market, it means that there is a net welfare loss amounting to $10 million in the market due to price control. The numeric value is interpreted as net welfare loss.