Transcript Welfare Analysis

Welfare Analysis
Consumer Surplus; Producer Surplus
Welfare Analysis of Tax; Welfare
Analysis of Price Control
Economic Efficiency
• A situation is economically inefficient if there is
some way to change it so that so that someone
gains while no one else loses.
• A change is a Pareto improvement if at least one
person gains and no one loses
• A change is economically efficient if the winners
could compensate the losers by enough to make
the change a Pareto improvement.
Assessing Benefits
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Consumer Sovereignty
“Willingness to Pay” = Consumer Benefit
Consumer Surplus
“Willingness to Sell” =Opportunity Cost
Producer Surplus
Consumer Surplus -- Difference
between Willingness to Pay and Price
Paid by Buyer
Price
r1
r2
r3
r4
P0
Demand
1
2
3 4
5
Quantity
Consumer Surplus Is Triangle Below Demand,
Above Market Price.
Price
Consumer
Surplus
P0
Demand
5
Quantity
Total Expenditure
Producer Surplus- Difference Between
Opportunity Cost and Selling Price
Price
t5
t4
t3
t2
t1
P0=t5
1
2
3
4
5
Quantity
Producer Surplus
Price
Supply
P0=t5
Producer Surplus
Quantity
Consumer and Producer Surplus - Market
Equilibrium
Price
Consumer Surplus
Supply
P0
Producer Surplus
Q0
Demand
Quantity
Reduce Output: Winners can not compensate
losers.
Price
Supply
A
B
C
D
E
F
P1
A - New CS
A+B+E - Old CS
C+D+F - Old PS
B+C+D - New PS
P0
Demand
Q1 Q0
Quantity
Suppliers gain B-F, but consumers lose B+E.
Analyze the Following
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Impact of Price Ceiling on Efficiency
Impact of Price Floor on Efficiency
Impact of Sales Tax on Efficiency
Impact of a Subsidy on Efficiency
Impact of Price Ceiling on Efficiency
Demand
A+B+C -- New CS
A+B+E -- Old CS
D -- New PS
C+D+F -- Old PS
Supply
A
B
C
D
E
F
Market Clearing Price
Price Ceiling
E+F is the Deadweight Loss Associated with Price Ceiling
Impact of Price Floor on Efficiency
A -- New CS
A+B+E -- Old CS
B+C+D -- New PS
C+F+D -- Old PS
Supply
A
Price Floor
B
E
F
C
Market clearing price
D
Demand
Q1
Q0
E+F is deadweight loss associated with the price floor.
SUMMARY
• Market Equilibrium is Efficient. No
Deadweight Loss.
• Price controls create a deadweight loss
• Also, there are costs associated with
rationing mechanisms, black markets etc.