Business Finance
Monopoly Basics

Question Description

government regulations often lead to dead weight losses. Would anyone like to choose a real world example to demonstrate this, and discuss government's incentive to do so regardless of this cost?

Final Answer

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Minimum wage and living wage laws can create a deadweight loss by causing employers to overpay fro employees and preventing low-skilled workers from securing jobs. Price ceilings and rent controls can also create  deadweight losses by discouraging production and decreasing supply of goods, services or housing below what consumers truly demand. Consumers experience shortages and producers earn less than they would otherwise. taxes are also said to create a deadweight loss  because they prevent people from engaging in purchases they would otherwise make because final price of the product will be above equilibrium market price.
Politicians love to rail against car dealers and mortgage lenders who surprise consumers with hidden costs. Yet, Congress hides from voters a huge part of the cost of government: hidden costs of taxes, which include lost income and jobs. Failing to account for these costs creates a bias in favour of bigger government and a less efficient tax code. When government taxes apples, people buy & sell fewer apples. That leaves both buyers and sellers worse off. Same thing happens when government taxes other goods, labour or capital.
Economists call that lost economic output the 'deadweight loss' of taxation. People still work, consume and invest. They just do it less often, which leaves the nation poorer.
Politicians are defrauding American people by not accounting for this hidden cost of government.
Congress can address this problem with a simple change: require Joint Committee on Taxation and Congressional Budget Office to account for deadweight loss of taxation in their cost estimates of legislation, baseline budget projections and budget options.
Office of Management and Budget already directs federal agencies to include deadweight loss  of federal taxes when doing cost-benefit analyses of federal spending. Congress must do the same.
Members of Congress and the people they represent have a right to know full cost of laws like ObamaCare before making up their minds.

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Jyoti18 (90)
New York University

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