1Welfare Analysis Consumer Surplus; Producer Surplus Welfare Analysis of Tax; Welfare Analysis of Price Control
2Economic EfficiencyA 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 losesA change is economically efficient if the winners could compensate the losers by enough to make the change a Pareto improvement.
3Assessing Benefits Consumer Sovereignty “Willingness to Pay” = Consumer BenefitConsumer Surplus“Willingness to Sell” =Opportunity CostProducer Surplus
4Consumer Surplus -- Difference between Willingness to Pay and Price Paid by Buyer QuantityP0Demandr1r2r3r435124
8Consumer and Producer Surplus - Market Equilibrium PriceConsumer SurplusSupplyP0DemandProducer SurplusQ0Quantity
9Reduce Output: Winners can not compensate losers. PriceA - New CSA+B+E - Old CSC+D+F - Old PSB+C+D - New PSSupplyAP1BEP0CFDDemandQuantityQ1Q0Suppliers gain B-F, but consumers lose B+E.
10Analyze the Following Impact of Price Ceiling on Efficiency Impact of Price Floor on EfficiencyImpact of Sales Tax on EfficiencyImpact of a Subsidy on Efficiency
11Impact of Price Ceiling on Efficiency A+B+C -- New CSA+B+E -- Old CSD -- New PSC+D+F -- Old PSDemandASupplyBEMarket Clearing PriceCFPrice CeilingDE+F is the Deadweight Loss Associated with Price Ceiling
12Impact of Price Floor on Efficiency A -- New CSA+B+E -- Old CSB+C+D -- New PSC+F+D -- Old PSSupplyAPrice FloorBEMarket clearing priceCFDDemandQ1Q0E+F is deadweight loss associated with the price floor.
13SUMMARYMarket Equilibrium is Efficient. No Deadweight Loss.Price controls create a deadweight lossAlso, there are costs associated with rationing mechanisms, black markets etc.