Which of the following statements about deadweight loss (DWL) is true?

• A. Deadweight loss is eliminated when a price ceiling is imposed.
• B. Deadweight loss increases total welfare in the market.
• C. Deadweight loss occurs only in perfectly competitive markets at equilibrium.
• D. Deadweight loss represents the loss of total surplus that occurs when a market is not in equilibrium.

Answer: (D)

Verified step by step guidance

1. Understand the concept of deadweight loss (DWL): DWL is the loss of total surplus (consumer surplus plus producer surplus) that occurs when a market is not operating at its efficient equilibrium, often due to distortions like taxes, price ceilings, or price floors.
2. Analyze the first statement: "Deadweight loss is eliminated when a price ceiling is imposed." Consider that a price ceiling, if set below the equilibrium price, usually causes shortages and reduces total surplus, thus creating or increasing deadweight loss rather than eliminating it.
3. Analyze the second statement: "Deadweight loss increases total welfare in the market." Recall that deadweight loss represents inefficiency and a loss of welfare, so it cannot increase total welfare; it always reduces it.
4. Analyze the third statement: "Deadweight loss occurs only in perfectly competitive markets at equilibrium." Recognize that deadweight loss arises when markets are not at equilibrium or are distorted, so it does not occur at equilibrium in perfectly competitive markets; rather, it occurs when there are distortions or interventions.
5. Conclude that the correct understanding is: Deadweight loss represents the loss of total surplus that occurs when a market is not in equilibrium, which aligns with the last statement provided.