11- How does deadweight occur? (10 points) a) Use a real word example (e. g taxes) and explain with a graph. b) Discuss its effect on social welfare.

a) Deadweight loss occurs when there is a loss of economic efficiency that can occur when the equilibrium outcome is not achievable or not achieved. A common example of deadweight loss is taxes. When a tax is imposed on a good or service, it increases the price for consumers and decreases the price for producers, leading to a decrease in the quantity of the good or service that is bought and sold. This results in a deadweight loss, which is the loss of economic efficiency that occurs when the equilibrium outcome is not achievable.<br /><br />To illustrate this with a graph, let's consider the market for apples. The demand curve represents the quantity of apples that consumers are willing and able to buy at different prices, while the supply curve represents the quantity of apples that producers are willing and able to sell at different prices. The equilibrium point is where the demand and supply curves intersect, representing the quantity of apples that would be bought and sold in a free market.<br /><br />When a tax is imposed on apples, it increases the price for consumers and decreases the price for producers. This causes a shift in the supply curve, as producers are willing and able to sell fewer apples at each price. The new equilibrium point is where the new supply curve intersects the demand curve, representing a lower quantity of apples that are bought and sold.<br /><br />The deadweight loss is represented by the area between the original equilibrium point and the new equilibrium point. This area represents the loss of economic efficiency that occurs when the equilibrium outcome is not achievable.<br /><br />b) The effect of deadweight loss on social welfare is that it reduces the overall welfare of society. When there is a deadweight loss, it means that the market is not allocating resources efficiently, and this leads to a loss of economic welfare. In the case of taxes, the deadweight loss represents the loss of consumer and producer surplus that occurs when the market is not in equilibrium. This loss of surplus represents the cost of the tax to society, as it reduces the overall welfare of consumers and producers.