Final answer:
Deadweight loss is the reduction in social surplus due to an economy producing at an inefficient quantity, often arising from price controls. It represents the lost benefits to society when consumer and producer surplus are not maximized due to market inefficiencies or interventions.
Step-by-step explanation:
The term deadweight loss refers to the loss of economic efficiency that occurs when the equilibrium quantity of a good or service is not produced. This creates a situation where the total social surplus, which is the sum of consumer surplus and producer surplus, is reduced. Deadweight loss represents lost benefits to society due to inefficiency. In particular, it can occur because of price controls that prevent mutually beneficial transactions between suppliers and demanders.
For instance, when a price ceiling is set below the equilibrium price, it can lead to a deadweight loss as there will be a shortage, and some consumers who are willing to pay more for the product and producers who are willing to sell at higher prices are unable to engage in a transaction. This is illustrated as the area U + W in an economic model, which showcases the lost opportunities for trades that would increase both consumer and producer surplus.