Deadweight loss refers to the loss of economic efficiency that occurs when resources are not allocated optimally in a market. It represents the reduction in total surplus (consumer surplus + producer surplus) caused by market distortions such as taxes, subsidies, or regulations.
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Market Failure: Market failure occurs when markets fail to allocate resources efficiently due to externalities (costs/benefits imposed on third parties), public goods (non-excludable and non-rivalrous), or imperfect competition.
Marginal Cost: Marginal cost refers to the additional cost incurred by producing one more unit of a good or service. It helps determine optimal production levels and pricing decisions.
Subsidy: A subsidy is a government payment or support given to producers or consumers to encourage the production, consumption, or development of certain goods or services. It aims to reduce costs and increase market activity.