Net social welfare loss refers to the overall decrease in societal well-being that occurs when resources are not allocated efficiently. This situation often arises due to market failures, such as monopolies, externalities, or government interventions that distort market outcomes. Essentially, it represents the loss of economic efficiency in terms of both consumer and producer surplus.
For example, consider a situation where a monopoly sets prices higher than the competitive market level. In this case, the monopolist enjoys higher profits, but consumers are paying more for a product than they would in a competitive market, leading to less consumption than is socially optimal. This discrepancy between the higher monopoly price and the lower price that would prevail in a competitive market results in a net social welfare loss, as the excess burden of the monopoly pricing leads to fewer transactions and a net loss in total welfare.
On the flip side, a net social welfare gain can be illustrated through the introduction of a new technology that significantly lowers production costs and increases product availability. For instance, when solar panel technology advances and becomes cheaper to produce, not only do consumers benefit from lower prices but the environment benefits as well due to reduced fossil fuel usage. This creates a situation where both consumer surplus and producer surplus increase, leading to enhanced overall societal welfare compared to the previous state.