<blockquote>
<p>I understand the negative effect on the market specifically, but won't those who decide not to participate in the market being taxed simply spend their money in another market, thus not affecting society as a whole adversely?</p>
</blockquote>
<p>Generally no with an exception of some special cases. Spending them at a different market than they originally wanted is precisely what creates the loss of social welfare and affects society negatively (see Mankiws Principles of Economics pp 153 for more discussion).</p>
<p>What matters is utility not spending. If someone first option is to consume banana, but due to bananas being heavily taxed they pick their second best option of consuming oranges those people are worse off as they are consuming goods that give them less utility.</p>
<p>The deadweight loss is created because the tax inserts a wedge between social benefits and costs of consuming a good and private ones.</p>
<p>Note, via income effects taxes could even in rare cases result in more output and thus money being spent in an economy (for example, when government does not taxes leisure but does taxes all other regular goods, income effect from such taxation could make people to supply more labor to the economy and produce higher output of regular goods, but overall utility of all people together would be lower nonetheless).</p>
<p>One way how this could theoretically be avoided would be a situation where every possible consumption is taxed at exactly the same rate and all taxed money is in some way given back to consumers (to cancel the income effects). Nonetheless, in practice that is nearly impossible since there are many goods such as leisure that are practically impossible to tax. Or governments could use lump sum taxes that are non-distortionary although these are not really applicable to goods markets.</p>
<p>However, note it is more appropriate to say that the tax has negative effect on a welfare of the society. That is not the same as saying it’s bad for the society. Maximizing social welfare is not necessarily moral ideal for everyone. People can legitimately care about equity and other issues even at a cost of living in society with less social welfare.</p>

CC BY-SA 4.0
2021-10-28T09:04:41.833Z
@user253751 yes it is an specific economic term that is rigorously defined and not the same as loose vague usage in common non-science English
1muflon1
CC BY-SA 4.0
2021-10-28T10:05:31.913Z
@user253751 no that is social welfare function used by government that depending on its type can have preferences for redistribution but that is not just social welfare/welfare of a society(without any qualifications like Rawlsian social welfare or Benthamite social welfare) have a look at varians micro chapter on welfare economics. Welfare is defined in terms of the total surplus which is constructed from individual utilities.
1muflon1
CC BY-SA 4.0
2021-10-28T10:27:09.297Z
@user253751 are you trolling? Please read what I have written. 1. That Wikipedia page talks about social welfare functions not about definition of term social welfare 2. That Wikipedia page itself actually explains that maximizing social welfare does not mean you are caring about distribution of the income 3. Wikipedia itself states it’s unreliable source and should not be used for academic purposes so yes please find a book
1muflon1
CC BY-SA 4.0
2021-10-28T10:33:12.167Z
@user253751 1. You claimed I claimed the Wikipedia page is wrong. 2. Wikipedia page discusses various social welfare **functions** not just the term social welfare. 3. Wikipedia page does not mention it but when we talk about social welfare we refer to what you as a non-Economist can think of as a  ‘vanilla’ definition - that is the common usage across virtually all textbooks does not matter whether we talk about Varian or Mankiw. In my answer I was talking just about social welfare not Rawlsian social welfare function nor Benthamite social welfare function but just to the soc. welfare
1muflon1
CC BY-SA 4.0
2021-10-28T10:58:47.897Z
By the way Wikipedia also literally says that “in mainstream economics, economic surplus also known as total welfare or total **social welfare** or Marshallian surplus refers to two related quantities: consumer surplus… producer surplus…” And goes on explaining how it is defined in terms of sum of various surpluses. Furthermore, Wikipedia should not be used for academic purposes but you will find the same definition in above mentioned textbooks
1muflon1
CC BY-SA 4.0
2021-10-27T20:28:39.663Z
2021-10-27T20:52:10.007Z
2021-10-27T20:52:10.007Z
1muflon1
<p>I have learned that in a perfectly competitive market in the absence of externalities, taxes will impose a deadweight loss upon society, due to reduced market participation by consumers and producers. And that when designing tax codes, policymakers would benefit society the most by minimizing deadweight loss, such as by taxing markets with inelastic supply and demand. My question is why is this deadweight loss considered negative for society? I understand the negative effect on the market specifically, but won't those who decide not to participate in the market being taxed simply spend their money in another market, thus not affecting society as a whole adversely? The money lost to deadweight loss doesn't simply disappear right?</p>

<microeconomics><utility><supply-and-demand><elasticity><taxation>
Why is Deadweight Loss Bad for Society?
irdk
# Why is Deadweight Loss Bad for Society?

(Asked by: username_0 on 2021-10-27)

I have learned that in a perfectly competitive market in the absence of externalities, taxes will impose a deadweight loss upon society, due to reduced market participation by consumers and producers. And that when designing tax codes, policymakers would benefit society the most by minimizing deadweight loss, such as by taxing markets with inelastic supply and demand. My question is why is this deadweight loss considered negative for society? I understand the negative effect on the market specifically, but won't those who decide not to participate in the market being taxed simply spend their money in another market, thus not affecting society as a whole adversely? The money lost to deadweight loss doesn't simply disappear right?

**Tags:** microeconomics, utility, supply-and-demand, elasticity, taxation


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## 1 answers

### Answer by username_1 on 2021-10-27. Score: 3 | Accepted answer

> I understand the negative effect on the market specifically, but won't those who decide not to participate in the market being taxed simply spend their money in another market, thus not affecting society as a whole adversely?

Generally no with an exception of some special cases. Spending them at a different market than they originally wanted is precisely what creates the loss of social welfare and affects society negatively (see Mankiws Principles of Economics pp 153 for more discussion).

What matters is utility not spending. If someone first option is to consume banana, but due to bananas being heavily taxed they pick their second best option of consuming oranges those people are worse off as they are consuming goods that give them less utility.

The deadweight loss is created because the tax inserts a wedge between social benefits and costs of consuming a good and private ones.

Note, via income effects taxes could even in rare cases result in more output and thus money being spent in an economy (for example, when government does not taxes leisure but does taxes all other regular goods, income effect from such taxation could make people to supply more labor to the economy and produce higher output of regular goods, but overall utility of all people together would be lower nonetheless).

One way how this could theoretically be avoided would be a situation where every possible consumption is taxed at exactly the same rate and all taxed money is in some way given back to consumers (to cancel the income effects). Nonetheless, in practice that is nearly impossible since there are many goods such as leisure that are practically impossible to tax. Or governments could use lump sum taxes that are non-distortionary although these are not really applicable to goods markets.

However, note it is more appropriate to say that the tax has negative effect on a welfare of the society. That is not the same as saying it’s bad for the society. Maximizing social welfare is not necessarily moral ideal for everyone. People can legitimately care about equity and other issues even at a cost of living in society with less social welfare.

> **Comments:**
> **username_1**: @user253751 yes it is an specific economic term that is rigorously defined and not the same as loose vague usage in common non-science English  
> **username_1**: @user253751 no that is social welfare function used by government that depending on its type can have preferences for redistribution but that is not just social welfare/welfare of a society(without any qualifications like Rawlsian social welfare or Benthamite social welfare) have a look at varians micro chapter on welfare economics. Welfare is defined in terms of the total surplus which is constructed from individual utilities.  
> **username_1**: @user253751 are you trolling? Please read what I have written. 1. That Wikipedia page talks about social welfare functions not about definition of term social welfare 2. That Wikipedia page itself actually explains that maximizing social welfare does not mean you are caring about distribution of the income 3. Wikipedia itself states it’s unreliable source and should not be used for academic purposes so yes please find a book  
> **username_1**: @user253751 1. You claimed I claimed the Wikipedia page is wrong. 2. Wikipedia page discusses various social welfare **functions** not just the term social welfare. 3. Wikipedia page does not mention it but when we talk about social welfare we refer to what you as a non-Economist can think of as a  ‘vanilla’ definition - that is the common usage across virtually all textbooks does not matter whether we talk about Varian or Mankiw. In my answer I was talking just about social welfare not Rawlsian social welfare function nor Benthamite social welfare function but just to the soc. welfare  
> **username_1**: By the way Wikipedia also literally says that “in mainstream economics, economic surplus also known as total welfare or total **social welfare** or Marshallian surplus refers to two related quantities: consumer surplus… producer surplus…” And goes on explaining how it is defined in terms of sum of various surpluses. Furthermore, Wikipedia should not be used for academic purposes but you will find the same definition in above mentioned textbooks  

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