Chapter 10 - Chapter 10 Consumer Surplus and Dead Weight...

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Chapter 10 Consumer Surplus and Dead Weight Loss Economists and policymakers often want to know not only whether particular policies make people better off or worse off — they also need to quantify how much better off or worse off different consumers are. 1 At first glance, this may seem an impossible task given what we have said in Chapter 4 about the inherent impossibility of measuring happiness or satisfaction in an objective way. It turns out, however, that the tools we have developed will allow us to measure consumer welfare in objective terms without us having to measure happiness directly. Rather, we will find ways of quantifying how much better off or worse off consumers are in different economic circum- stances by asking how much they are willing to pay to avoid particular circumstances or how much compensation would be required to make it up to them when circumstances change. This way of thinking about welfare effects from institutional or policy changes allows us then to address the following question: Is it at least in principle possible to compensate those who lose from the policy with part of the gains accruing to those who gain from the policy? If the answer is yes, then, at least in principle, there is a way to make the world more efficient — to make some people better off without making anyone worse off. If the answer is no, on the other hand, then we know that the new situation will be less efficient . Put differently, if the winners from a policy gain more than the losers lose, the policy could in principle be accompanied by a compensation scheme that would result in unanimous approval of the policy! Of course, just because it is in principle possible to come up with such a compensation scheme does not mean it is possible in practice . Real world policies come, at best, with imperfect compen- sation schemes – and thus rarely enjoy unanimous approval. As a result, it is not immediate that we should in fact favor all policies that create more benefits than costs – because in some instances we may in fact place more weight on the decline in welfare of those who lose than on the gains in welfare of those who win. For instance, suppose a group of wealthy citizens would be willing to pay $100 million to have a certain policy implemented, and a group of poor citizens would lose $1 million as a result. If we can’t figure out a way to accompany this policy with compensation to those who would otherwise lose, we might decide that the policy is not worth it – that we in essence 1 Chapters 2, 4 through 7 and the first sections (Sections 9A.1 and 9B.1) in 9 are required reading for this chapter. Chapters 3 and 8 as well as the remainder of chapter 9 (i.e. Sections 9A.2, 9A.3, 9B.2 and 9B.3) are not necessary for this chapter.
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284 Chapter 10. Consumer Surplus and Dead Weight Loss place more weight on the $1 million loss than on the $100 million gain because the loss would be borne by the most vulnerable among us.
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