Economic Loss Concept, Types & Rule

What is Economic Loss?

Individuals and businesses often face circumstances or events which cause them to lose money. This is called economic loss. But precisely what is economic loss? A simple economic loss definition is the financial loss or loss of money through circumstances that exclude those that involve personal injury. Typically, a business or individual can view their financial statements to determine their total economic loss over a given period. Essentially, any loss or damage to physical property, loss or unexpected expense of physical money, or even the loss of time or the chance to earn money could be considered economic loss.

Personal injuries are not included because in the definition of economic loss because it can often include non-economic damages which are difficult to quantify such as emotional or physical pain. If an individual or entity is liable for an injury, the legal case is handled separate from purely economic loss cases which usually involve a breach in contract. Though personal injury cases do often include compensation for monetary costs such as medical bills, there typically isn't a preexisting legal contract between individuals in personal injury cases (just unwritten social contracts which must be assessed by a jury).

Though economic loss involves losing money, there are many ways to lose money or financial value, some more direct than others. For this reason, economists categorize economic loss into two main types: pure economic loss and consequential economic loss.

The graph compares the expenses, support, revenue, and assets of a business. A financial statement would should any economic loss.

Pure Economic Loss

Pure economic loss is defined as circumstances that result in only a loss of money. Therefore, pure economic loss excludes property damage because money isn't the only thing lost in such a circumstance; the loss isn't purely monetary. An example of pure economic loss is a poor stock investment. If someone purchases stock, they are trading money for a share in a company. However, if the stock price falls and the individual sells the stock at a lower price, they will have realized some financial losses.

Another example of pure economic loss is if a business loses some customers and, therefore, the revenue that they bring. This can occur if the demand for a product or service goes down or if a competitor's business opens and attracts some customers away from the original business. Some seasonal industries experience temporary pure economic losses during the off-seasons of their industries.

Consequential Economic Loss

Consequential economic loss is a financial loss that directly results from a circumstance or event. Consequential economic losses do not have to be pure money losses. They can include other types of losses such as property damage, loss of employees, or loss of opening time as a business. For example, if a restaurant fire causes damage to the kitchen and building, the restaurant will have to temporarily close to repair damages. This leads to financial loss in the costs of repairs and the loss of income during the time that the restaurant must remain closed.

Another example of consequential economic loss is if the same restaurant has an outbreak of the flu among its employees and cannot support the number of customers it usually has with its decreased staff. This will lead to longer waiting lines for tables and a likely temporary decrease in customers directly causing a short-term financial loss.