The area below the price and above the supply curve

 Is the allocation of resources determined by free markets the best
outcome as far as economic well being is concerned? YES!

Consumer and Producer Surplus in the Market Equilibrium:
* In the graph below, the demand curve reflects the value to the buyers
(willingness to buy) and the supply curve reflects the cost to sellers.
- The total area between the supply and demand curves up to the point of
equilibrium represents the total surplus in this market.
- If the value to the marginal buyer EXCEEDS the cost to the marginal seller
(eg. Q
200
above), then increasing the quantity will raise the total surplus.
- If the value to the marginal buyer is LESS than the cost to the marginal
seller (eg. Q
700
above), then decreasing the quantity will raise the total
surplus.
Three Insights About Free Markets:
1. Allocate the supply of goods to the buyers who value them most highly
(measured by their willingness to pay).
2. Allocate the demand for goods to the sellers who can produce them at the
least cost.
3. Produce the quantity of goods that maximizes total surplus (CS +PS) –
total surplus is maximized at equilibrium.
* Read conclusion on pg. 213 & the Algebra section on pg. 217.
Chapter 10: Externalities