1 Welfare Analysis Consumer Surplus; Producer Surplus Welfare Analysis of Tax; Welfare Analysis of Price Control
2 Economic 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.
3 Assessing Benefits Consumer Sovereignty “Willingness to Pay” = Consumer BenefitConsumer Surplus“Willingness to Sell” =Opportunity CostProducer Surplus
4 Consumer Surplus -- Difference between Willingness to Pay and Price Paid by Buyer QuantityP0Demandr1r2r3r435124
9 Reduce 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.
10 Analyze the Following Impact of Price Ceiling on Efficiency Impact of Price Floor on EfficiencyImpact of Sales Tax on EfficiencyImpact of a Subsidy on Efficiency
11 Impact 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
12 Impact 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.
13 SUMMARYMarket Equilibrium is Efficient. No Deadweight Loss.Price controls create a deadweight lossAlso, there are costs associated with rationing mechanisms, black markets etc.