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Analysis of Deadweight Loss
The taxes over goods and services also cause deadweight losses. This can be explained because these taxes increase the costs of producing goods and services. When these costs increase artificially by taxes, people respond by producing and consuming less units then used to before the taxes. Given that each unit that was consumed before the tax was a unit that was a benefit that exceeded the costs, the resulting reduction in production as a consequence of the tax necessarily reduces the total surplus and causes a deadweight loss.
The Distinctive Of Perfect Competition
Free markets only produce the units by which the benefits are at least as great as the costs. Another wonderful thing about free markets and the competition is that production is done at the lowest cost possible.
This is something very important because it means that the free markets are as efficient as possible in trying to turn resources into the goods and services that the people want to buy.
Besides this, the markets save a lot of money for society because they produce effectively without human intervention being needed. Huge amounts of salaries do not have to be paid to some experts to make sure the markets are operating efficiently; the markets do this job for free.