What is the formula for calculating deadweight loss?

The formula for calculating deadweight loss is expressed as 1/2 * base * height. This formula is derived from the concept of the area of a triangle, which is a visual representation of deadweight loss on a supply and demand graph.

In cases of market inefficiencies, such as when a tax is imposed, the deadweight loss can be illustrated as a triangular area between the supply and demand curves. The "base" of the triangle typically represents the quantity difference between the equilibrium quantity without the tax and the quantity with the tax. The "height" of the triangle corresponds to the price difference between the consumer's willingness to pay and the producer's cost due to the tax.

Since the area of a triangle is calculated as (1/2 * base * height), this formula provides a way to quantify the loss in economic efficiency – which occurs when consumers and producers are not operating at their optimal levels of transaction – as a result of the imposition of taxes or other market distortions. This understanding is crucial in microeconomics as it relates to how market forces can lead to inefficiencies impacting overall welfare.