Editing Deadweight loss (section)

==Hicks vs. Marshall==
The [[Hicksian demand function|Hicksian]] (per [[John Hicks]]) and the [[Marshallian demand function|Marshallian]] (per [[Alfred Marshall]]) demand function differ about deadweight loss. After the [[consumer surplus]] is considered, it can be shown that the Marshallian deadweight loss is zero if demand is perfectly [[elasticity (economics)|elastic]] or supply is perfectly inelastic. However, Hicks analyzed the situation through [[indifference curves]] and noted that when the Marshallian demand curve is perfectly inelastic, the policy or economic situation that caused a distortion in [[relative price]]s has a [[substitution effect]], i.e. is a deadweight loss.

In modern economic literature, the most common measure of a taxpayer's loss from a distortionary tax, such as a tax on bicycles, is the [[equivalent variation]], the maximum amount that a taxpayer would be willing to forgo in a lump sum to avoid the tax. The deadweight loss can then be interpreted as the difference between the equivalent variation and the revenue raised by the tax. The difference is attributable to the behavioral changes induced by a distortionary tax that are measured by the substitution effect. However, that is not the only interpretation, and [[Arthur Cecil Pigou|Pigou]] did not use a lump sum tax as the point of reference to discuss deadweight loss (excess burden).<ref>Lind and Granqvist (2010)</ref>