Deadweight Loss (DWL) Calculator

The deadweight loss (DWL) calculator allows you to make swift and simple estimations of deadweight loss. Simply complete all the fields in the form provided and clicking on the "Calculate" button will give you your results.

What Is Deadweight Loss?

Deadweight loss refers to the losses society experiences due to taxes and price control. These manipulate the prices of goods and so are responsible for deadweight losses caused by variations in supply and demand. For calculation of deadweight loss, you must know how the price has changed and the changes in the quantities required.

As an example, let's take Jane, who owns a highly successful café. She has been so successful that she is planning on opening a second store. To open the second store, she will require an extra employee, as she won't be able to be in both shops at once. She examines her financial situation and finds that she will be able to pay this new worker $10 per hour. She then finds that the minimum wage in her state has just been increased to $14 per hour.

It is clear to Jane that she cannot pay a worker $14 per hour and make a profit, so she has to scrap her plans for business expansion. This means that Jane loses out, as she can't grow her business, her potential employee loses out as there is no longer a job for them, and her city loses out as they will not receive taxes from her new establishment. Economists call this a deadweight loss. Deadweight losses are those suffered by society as a result of tax and price control.

DWL Calculator

Causes of Deadweight Loss

Three main elements contribute to deadweight loss:

Price ceilings: These are controls on prices set by government, prohibiting sellers from charging more than a certain amount for goods or services.

Taxes: Taxes are extra charges government adds to the selling prices of goods or services. One example is the sales taxes that certain states impose on sales of some products or services.

Price floors: These are controls on prices set by government, prohibiting sellers from charging less than a certain amount for goods or services. One example of a price floor is the minimum wage, where the government decrees that a person cannot sell their labor for less than a certain hourly rate.

All three of these elements can be responsible for deadweight loss because they change the supply and demand of goods by manipulating prices.

How to Calculate Deadweight Loss

For the calculation of deadweight loss, you will require four different figures:

  1. The original price of the product in question (Po)
  2. The new price for the product once taxes, price ceiling and/or price floor is taken into account (Pn)
  3. The quantity originally requested of the product in question (Qo)
  4. The new quantities of the product requested once taxes, price ceiling and/or price floor is introduced (Qn)

Deadweight loss can be determined by the following formula:

Deadweight Loss (DWL) = (Pn − Po) × (Qo − Qn) / 2

Let's go back to the example of Jane and her café. Imagine the federal government has introduced a new tax of one dollar for every pound of coffee she sells. Prior to the tax being introduced, Jane was paying six dollars (Po) a pound for coffee, and now she's paying seven dollars a pound (Pn). Due to the price increase, she can't buy as much coffee as she did before. Her budget for buying coffee was $13200 a year, so rather than buying 2200 (Qo) pounds a year, now she can only buy 1760 (Qn) pounds. Using these figures, you can calculate what deadweight loss this tax causes:

DWL = (Pn − Po) × (Qo − Qn) / 2

DWL = ($7 − $6) × (2200 − 1760) / 2

DWL = $1 × 440 / 2

DWL = $220

In this case, the wholesalers who supply Jane with coffee are losing $220 of sales each year because of the tax. Jane will also lose out because she will have lower stock levels and so will sell less.

You may also be interested in our free Price Elasticity of Demand (PED) Calculator

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