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Unformatted text preview: 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 changes resulting from institutional or policy changes allows us then to address the following question whenever a particular change is proposed: 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 . 10A An Intuitive Analysis of Consumer Welfare We will begin our analysis of this measurement of consumer welfare by quantifying how much bet- ter off or worse off consumers are for being able to purchase goods voluntarily at given market prices. Put differently, we will ask how much better off a consumer is for being able to participate in a market rather then be excluded from it. This will lead us to define terms like marginal and total willingness to pay as well as consumer surplus . We will then proceed to demonstrate how policymakers might analyze the impact of particular proposals on consumers in order to deter- mine whether these proposals should be implemented. In the process, we will see once again the 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, subsec:9B.2 and 9B.3 are not necessary for this chapter. 240 Chapter 10. Consumer Surplus and Dead Weight Loss importance of recognizing the difference between income and substitution effects and how the substitution effect contributes to dead weight losses for society while the income effect does not....
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This note was uploaded on 04/07/2008 for the course ECON 55 taught by Professor Rothstein during the Fall '07 term at Duke.
- Fall '07
- Consumer Surplus