Economic Loss Concept, Types & Rule

Joseph Comunale, Jennifer Francis
  • Author
    Joseph Comunale

    Joseph Comunale obtained a Bachelor's in Philosophy from UCF before becoming a high school science teacher for five years. He has taught Earth-Space Science and Integrated Science at a Title 1 School in Florida and has Professional Teacher's Certification for Earth-Space Science.

  • Instructor
    Jennifer Francis

    Jennifer has a Masters Degree in Business Administration and pursuing a Doctoral degree. She has 14 years of experience as a classroom teacher, and several years in both retail and manufacturing.

Learn the definition of economic loss. Discover the difference between pure economic loss and consequential economic loss with explanations and example scenarios. Updated: 03/01/2022

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.

This graph illustrates Wikimedia Foundation financial development over some years.


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.

What Is Economic Loss?

Economic loss is a term used to describe circumstances when an individual or an organization loses money. The term covers financial loss that is usually visible in a balance sheet or other financial statements. While economic loss includes instances of loss in income suffered by a person or a business, it excludes any cases in which that loss of income is due to physical, personal injury. Economic loss may be caused by a natural disaster, such as a hurricane, or by the negligence of another party.

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Types of Economic Loss

Because economic loss can take on so many different forms, economists use several divisions and sub-categories to further describe loss conditions. There are two main types of economic loss: pure economic loss and consequential economic loss.

Pure economic loss is usually defined as financial loss that excludes property damage. In other words, in cases of pure economic loss, the only thing that is lost is money. Examples of pure economic loss might include a loss of funds as a result of an investment not performing, the loss of business due to competitors' success, or the loss of goodwill in a community because of bad online reviews.

Consequential economic loss is directly caused by another event. In cases of consequential loss, the loss of money is a direct result of another loss or circumstance. Examples can include economic loss caused by property damage or the unsatisfactory performance of goods.

Let's look at a few examples of economic loss and decide whether each one is pure or consequential.

Allie is employed by a big box retailer. The store becomes flooded one day during a storm and the owners had to cease operations for five weeks. Allie is unemployed for those five weeks and, as a result, was not earning income.

Which type of economic loss is this? If you said consequential economic loss, you are correct! Allie's economic loss is a consequence of the storm's physical destruction of the store. Let's try another. Here's another example:

Jacob makes a $50,000 investment in a start-up company. A contract is drawn up stating that Jacob will be repaid $65,000 in five years. One year into the deal, the start-up company goes bankrupt and the entrepreneur behind it is imprisoned on charges unrelated to the business. Jacob is now out $50,000.

So, pure or consequential? What do you think? The answer is that this is an example of pure economic loss because the only thing that is lost is money. There is no physical damage or event that directly caused Jacob's loss.

The Rule of Economic Loss

Let's stay with Jacob for a second. After his start-up goes bankrupt, is his money gone forever? Is he just tough out of luck? Well, no, thank goodness he's not. Jacob may actually be able to recoup his investment. To do so, he would have to sue the start-up company and its owner. Fortunately, Jacob had a contract for this investment deal and so his chances of being able to get his money back are pretty good, according to the rule of economic loss.

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Video Transcript

What Is Economic Loss?

Economic loss is a term used to describe circumstances when an individual or an organization loses money. The term covers financial loss that is usually visible in a balance sheet or other financial statements. While economic loss includes instances of loss in income suffered by a person or a business, it excludes any cases in which that loss of income is due to physical, personal injury. Economic loss may be caused by a natural disaster, such as a hurricane, or by the negligence of another party.

Types of Economic Loss

Because economic loss can take on so many different forms, economists use several divisions and sub-categories to further describe loss conditions. There are two main types of economic loss: pure economic loss and consequential economic loss.

Pure economic loss is usually defined as financial loss that excludes property damage. In other words, in cases of pure economic loss, the only thing that is lost is money. Examples of pure economic loss might include a loss of funds as a result of an investment not performing, the loss of business due to competitors' success, or the loss of goodwill in a community because of bad online reviews.

Consequential economic loss is directly caused by another event. In cases of consequential loss, the loss of money is a direct result of another loss or circumstance. Examples can include economic loss caused by property damage or the unsatisfactory performance of goods.

Let's look at a few examples of economic loss and decide whether each one is pure or consequential.

Allie is employed by a big box retailer. The store becomes flooded one day during a storm and the owners had to cease operations for five weeks. Allie is unemployed for those five weeks and, as a result, was not earning income.

Which type of economic loss is this? If you said consequential economic loss, you are correct! Allie's economic loss is a consequence of the storm's physical destruction of the store. Let's try another. Here's another example:

Jacob makes a $50,000 investment in a start-up company. A contract is drawn up stating that Jacob will be repaid $65,000 in five years. One year into the deal, the start-up company goes bankrupt and the entrepreneur behind it is imprisoned on charges unrelated to the business. Jacob is now out $50,000.

So, pure or consequential? What do you think? The answer is that this is an example of pure economic loss because the only thing that is lost is money. There is no physical damage or event that directly caused Jacob's loss.

The Rule of Economic Loss

Let's stay with Jacob for a second. After his start-up goes bankrupt, is his money gone forever? Is he just tough out of luck? Well, no, thank goodness he's not. Jacob may actually be able to recoup his investment. To do so, he would have to sue the start-up company and its owner. Fortunately, Jacob had a contract for this investment deal and so his chances of being able to get his money back are pretty good, according to the rule of economic loss.

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Frequently Asked Questions

What does economic loss mean?

Economic loss is any financial loss that is experienced by an individual, business, or entity. Economic loss excludes personal injury, which is regulated by tort law instead. Economic loss is the loss of money through indirect or direct means.

What are the effects of economic loss?

The effects of economic losses are a loss of money one way or another. Either the individual or entity loses value, such as in the case of property damages and markets going down, or the individual loses customers, clients, or time that their business is operating.

What causes economic loss?

Things that cause economic loss can be damages to personal property or business property, sicknesses caused by health standards not being met by a business, or a loss of customers or clients. These things can either directly or indirectly lead to financial losses.

What is an example of an economic loss?

An example of economic loss would be if an individual purchases a stock for a higher price than the price they sell it. If the individual sells at a lower price, they will be realizing an economic loss because they lost money on the trade.

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