Question

is well known that total surplus is maximized when market exchanges occur under conditions of perfect competition and no interferences with exchange. If there is interference with exchange in a competitive market, will total dead weight loss necessarily be greatest when interference causes the quantity exchanged to fall to zero??

Answer 1

Deadweight loss is the loss in the efficiency in terms of loss in the consumer surplus and loss in the producer surplus. Now when there is an intervention in the market, that changes the price from the market clearing price, there is a loss in the efficiency in terms of reduced consumer surplus and producer surplus. The greater the interference, the greater will be the deviation between the new price and the market clearing price, and the greater will be the dead weight loss

Suppose that the new price is this set at a level which is very close to the price at which quantity demanded and supplied is zero. Clearly at this price, the loss in the consumer surplus and the producer surplus will be very high and it will reach its maximum when the quantity exchanged falls to zero.

therefore it is true that potential deadweight loss can be hundred percent of the social surplus when the interference generate a price level at which quantity exchanged is zero.