How does a tariff cause deadweight loss?

A tariff causes deadweight loss primarily by distorting market incentives, which can lead to inefficiencies in the allocation of resources. When a tariff is imposed, it raises the price of imported goods, making them less competitive compared to domestic products. This price increase discourages consumers from purchasing these imported goods, resulting in decreased demand. At the same time, the domestic industry might be encouraged to produce more due to reduced competition from imports, which can lead to oversupply.

This distortion creates a discrepancy between consumer preferences and the actual allocation of resources in the economy. Consumers may have preferred the imported goods at lower prices, but with the tariff in place, their purchasing choices are limited. Consequently, resources may be diverted from their most efficient uses to produce goods that might not be in high demand, leading to an overall loss in economic welfare. The reduction in total surplus (which includes both consumer and producer surplus) contributes to the deadweight loss associated with tariffs, indicating that the market is not operating at its optimum efficiency.