Question

3. The two deadweight triangles are the Consumption distortion and Production distortion losses. It is easy to understand why the Consumption distortion constitutes a loss for society. After all it raises the prices of goods to consumers, and even causes some consumers to drop out of the market altogether. It seems paradoxical that the Production distortion is considered an equivalent burden on society. After all, in this case, profits increase, and additional production (with its associated employment) comes on line. This would seem to be an offset rather than an addition to the burden or loss borne by society. - Explain why the Production distortion is indeed a loss to society, and what is wrong with the logic that leads to the apparent paradox

Answer 1

The production distortion is indeed a loss to society because the production distortion is an inefficient use of society's resources to produce a good that cannot be sold profitably at world prices.

How to illustrate the information?

It is simple to see why the consumption distortion is a loss for society. After all, it raises consumer prices and even causes some consumers to leave the market entirely. The Production Distortion is an inefficient use of society's resources to produce a good that cannot be sold profitably at world prices.

The production distortion is a social defeat because it results in a loss of consumer surplus that is not recovered by any other group in society. The real triangle here represents an inefficient allocation of society's resources to the production of goods that cannot be sold profitably at world prices.

Since these resources were previously used to produce export goods that could compete effectively, the net result has been a loss in real income to the country.

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