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Unformatted text preview: Department of Economics University of California, Berkeley ECON 100A Spring 2010- Section 14 GSI: Antonio Rosato Welfare Analysis Welfare analysis is basically the study of who gains and who loses and by how much. This is one of the cases where graphical analysis is really helpful for our understanding. The benchmark perfect competition We already know what consumer and producer surplus are in the context of a competitive market. Graphically, with linear demand and supply functions, they are the triangles between the demand curve and price ( CS ) and between the supply curve and price ( PS ). This situation is the benchmark benchmark for welfare analysis. In it the market is efficient, maximizing the size of CS + PS given the supply and demand. Why is this? Because the marginal cost of production is equal to the value the consumers give that last unit (their willingness to pay). Any situation in which this equality does not hold is not welfare maximizing....
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- Spring '08