Deadweight loss represents a fall in total surplus that occurs due to market distortions, such as taxes, subsidies, or price controls. When a market is not operating at its optimal level, resources are not allocated efficiently. This inefficiency can lead to a reduction in the overall benefit that consumers and producers receive from a good or service – known as total surplus.
In a perfectly competitive market, equilibrium is achieved, where the amount that consumers are willing to pay matches the cost of producing the good, leading to maximum efficiency and surplus. However, when a distortion exists, such as taxation, it can prevent transactions that would have occurred under free market conditions. This results in fewer trades, meaning both consumer and producer surplus are reduced, creating a deadweight loss. Thus, deadweight loss highlights the economic cost of inefficiencies in the market system, making option B the most accurate choice in this context.