Deadweight Loss

The reduction in total economic surplus (consumer surplus plus producer surplus) caused by market distortions such as taxes, subsidies, price controls, tariffs, or monopoly pricing that prevent transactions mutually beneficial to buyer and seller from occurring. Graphically, it is represented as the triangle between the supply and demand curves bounded by the tax-distorted output level and the free-market output level. In Indian tax policy, high GST rates on certain goods or inverted duty structures create deadweight losses by discouraging otherwise efficient production and consumption decisions.