Popularizing Deadweight Loss
Alex Tabarrok recently wrote a great explanation of the economic concept of deadweight loss:
Imagine that you want to go to New York on a trip. You value the trip at $50 and a bus ticket costs $40. Do you take the trip?
A. Yes. The value ($50) of the trip exceeds the cost of the ticket ($40) so you travel to New York.
How much consumer surplus (net value) do you get from the trip?
A. $10=$50-$40.
The government taxes bus tickets which raises the price of a bus ticket to $60. Do you take the trip?
A. No. The value of the trip is now less than the price of the ticket.
What happened to the $10 consumer surplus which you used to get when there was no tax?
A. It's gone since no trip takes place.
Did the government get any tax revenue from you?
A. No.
Key idea: Consumers lose but the government does not gain from trips that are not taken.
Conclusion: Deadweight loss is the value of the trips (trades) which do not happen because of the tax.
When you hear someone mention the "deadweight loss of taxes" on the economy, this is exactly what they mean: taxes that result in the government not getting money and consumers not getting what they wanted.