Deadweight loss refers to the economic inefficiency that occurs when the equilibrium for a good or service is not achieved. This can happen due to factors like taxes, subsidies, or price controls, which distort the natural supply and demand balance. As a result, fewer transactions occur than would in a perfectly competitive market, leading to a loss of total welfare.
When deadweight loss is present, both consumers and producers are worse off. Consumers may pay higher prices or face limited choices, while producers may receive lower profits. This inefficiency means that potential gains from trade are not fully realized, impacting overall economic health.