Does anyone here know of an article or book criticizing/supporting the concept of deadweight loss?
Also, I’m currently rereading Rothbard’s Man, Economy, and State, and I vaguely remember him attacking both deadweight loss and welfare theory (consumer/producer surplus, social benefit, etc) in his chapter “Monopoly and Competition”. Is my memory failing me or is that in Rothbard’s massive tome?
Thanks for any and all responses.
This isn’t a direct answer to your question, but I hope it helps nonetheless.
Wikipedia defines “deadweight loss” as:
In turn, “Pareto efficiency/optimality” is defined as:
I think the closest analogue to this in Austrian Economics would be the notion of every individual’s preferences being satisfied in the order in which he values them. Another way of putting this is that goods and services are allocated to those exact individuals who demand them the most urgently. That raises the question: how does one know which individuals demand them the most urgently? The answer that Austrian Economics gives is through their actions - in this case, specifically through their purchases. Of course, this view of “economic efficiency” is necessarily constrained by real-world conditions. Otherwise, “economic efficiency” could only be seen as an impossible condition, akin to an asymptote. Additionally, this view of “economic efficiency” is necessarily an ex post facto view, since one can’t predict anyone’s (even his own) value scale for any given point in the future.
What does all this mean for the concept of “deadweight loss”? I think it means that an Austrian-Economics equivalent could be formulated in the sense of one or more individual’s preferences not being satisfied in the order in which he values them. One obvious area where this would happen is in the area of price controls. A price floor for a good or service prevents individuals who value it at a lower price from satisfying their preference for it. Things are more complicated with a price ceiling for a good or service - in that case, some individuals who value it at some price will be prevented from satisfying their preference for it, because they’ll be “crowded out” by others. Either way, some number of individuals will not have their preferences satisfied in the orders in which they value them, which could be considered a form of “deadweight loss”.
Autolykos,
Thanks for the response and elaborating on Pareto efficiency.
Another form of deadweight loss in neoclassical analysis is when a firm, typically a monopolist or oligopolist, sells a good or service for a price exceeding its marginal cost. This is essentially the productivity theory of value in drag as well as the common fallacy of factor prices determining consumer goods prices as opposed to consumer goods prices determining factor prices (derived demand, discounted marginal value product, and the like). Just my two cents.
So like you said, deadweight loss can be used in a few select situations if it’s ever used at all. Naturally it is fallacious to apply it to utility.