Identify the market equilibrium quantity and price without the tax, subsidy, or distortion
Identify the new quantity traded after the tax, subsidy, or distortion
Calculate the change in quantity traded
Determine the wedge created between buyers’ and sellers’ prices, or between marginal benefit and marginal cost
Use the deadweight loss formula: 0.5 × wedge × change in quantity
For a tax, use: Deadweight Loss = 0.5 × tax per unit × reduction in quantity
For a subsidy, use: Deadweight Loss = 0.5 × subsidy per unit × increase in quantity beyond equilibrium
For a monopoly or other market distortion, use: Deadweight Loss = 0.5 × height of the welfare loss triangle × base of the triangle
If supply and demand are linear, use the triangle area formed by the distortion
Verify units are consistent before calculating
Express the final deadweight loss in monetary terms