2.2 Consumer and Producer Surplus.pdf - Consumer and Producer Surplus as Welfare Measures WELFARE MEASUREMENT IN COST-BENEFIT ANALYSIS Welfare

2.2 Consumer and Producer Surplus.pdf - Consumer and...

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Consumer and Producer Surplus as Welfare MeasuresWELFARE MEASUREMENT IN COST-BENEFIT ANALYSISWelfare Measurement in Cost-Benefit Analysis
Demand vs. Inverse Demand CurvesMarshallian Demand Curve: xi=f(m,p)Inverse Demand Curve:pi=f(x,m)U"lity Maximiza"on ProblemMax u(x,y) s.t. mpxx + pyyWelfare Measurement in Cost-Benefit Analysis
Willingness to Pay and Consumer SurplusConsumer surplus is theintegraEon under the inversedemand curve, but above theprice line.CS is not an exact measure ofwelfare but will generally beclose.Total willingness to pay – orhow much the consumer valuesthis consumpEon – is the fullarea under the demand curve.Welfare Measurement in Cost-Benefit Analysis
Willingness to Pay and Consumer SurplusWelfare Measurement in Cost-Benefit Analysis
Consumer Surplus using DemandIfD(P) = 10-2*P(and P*=2, Q*=6), then total CSLinear demand curves are easyto work with, but oSen morecomplex funcEons areesEmated.Consumer surplus requires us tointegrate under the demandcurve between the price paidand the choke price in thosecases.Welfare Measurement in Cost-Benefit Analysis
Consumer Surplus using Inverse DemandIfD(P) = 10-2*Pand P* = 2, Q*=6 thenInverse demand = D-1(Q) = 5 – ½*QUsing an inverse demand curvewe can also integrate to findconsumer surplus.

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