Deadweight Loss - Hicks Vs. Marshall

Hicks Vs. Marshall

An important distinction should be made between Hicksian (per John Hicks) and Marshallian (per Alfred Marshall) deadweight loss. The latter is related to the concept of consumer surplus, such that it can be shown that the Marshallian deadweight loss is zero where demand is perfectly elastic or supply is perfectly inelastic. However, Hicks analyzed the situation through indifference curves and noted that when the Marshallian Demand Curve exhibits perfect inelasticity, the policy or economic situation which caused a distortion in relative prices will have a substitution effect and that this substitution effect is a deadweight loss.

In modern economic literature, the most common measure of a taxpayer’s loss of a from a distortionary tax, such as a tax on bicycles, is the equivalent variation. The equivalent variation is the difference between the amount of money raised by the distortionary and the maximum amount that the taxpayer would be willing to pay to in a lump sum to avoid the distortionary tax. However, this is not the only interpretation and Lind & Granqvist (2010) point out that Pigou did not use a lump sum tax as the point of reference when discussing deadweight loss (excess burden).