I've heard these two terms crop up quite frequently, and suspect they may be interchangeable. Deadweight loss - I'm sure I've encountered this in tariff evaluation; for effects of indirect taxes, I've seen textbooks that use deadweight loss. Welfare loss - I've seen textbooks refer to the social costs of profit-maximising monopolies who set prices higher and output lower than that of perfectly competitive firms as welfare loss. Is there really a difference between deadweight loss and welfare loss?
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$\begingroup$ Isn't it just that dead-weight loss is mentioned in dollars or units of output whereas welfare loss is in utils? There is a rate at which one can be compensated for a given loss of welfare, but the units are very different. A thousand dollars of dead weight inefficiencies may be trivial to some households and unbearable to others. $\endgroup$– BKayCommented Oct 26, 2016 at 15:57
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2 Answers
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I would say all deadweight loss is welfare loss but not all welfare loss is deadweight loss.
For example an unregulated polluter causing a negative externaly results in a welfare loss compared to the social optimum. There is no 'missing production' and hence no deadweight loss in this case.
Edit: According to Wikipedia, the loss created by externalities is also classified as deadweight loss.
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A little observation from the answer above: Externalities do generate deadweight loss.
deadweight loss has to do with levels of output, so any level of output that is beyond or below social optimal generate deadweight loss. Every deadweight loss is a welfare loss. However, you could lose welfare due to changes in quality of some goods, which may still be the social optimal level, but society is losing utility due to quality decay.
