The Two Deadweight Triangles Are the Consumption Distortion and Production

question 69

Essay

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.

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Definitions:

IFRS

International Financial Reporting Standards, a set of accounting standards developed by the International Accounting Standards Board that is becoming the global standard for the preparation of public company financial statements.

GAAP

Generally Accepted Accounting Principles, the standard framework of guidelines for financial accounting used in the United States.

Development Costs

Expenditures associated with the design, development, and enhancement of a company's products or services before commercial production.

Bank Overdrafts

Occurs when withdrawals from a bank account exceed the available balance, resulting in a negative balance.