Consumer and Producer Surplus

1
Consumer and Producer Surplus
Mr. Greens Economics 2010 Dixie State College
Economics 2010 Home Page
2
Measuring Welfare

• How do I measure how well off I am?

• My own (and your own) choice of what I (you) want
  and need?
• Someone elses vision of what you and I and
  others ought to want and what we really need?

3
Measuring Human Wants and Needs
. . . the principle of (freedom) requires liberty
of tastes and pursuits, of framing the plan of
our life to suit our own character, of doing as
we like, subject to such consequences as may
follow, without impediment from our fellow
creatures, so long as what we do does not harm
them, even though they . . . think our conduct
foolish, perverse, or wrong. John Stuart Mill,
On Liberty, Hackett Publishing Company, Inc.,
1978, p. 12.
4
Measuring Welfare

• What if my conduct is perverse, foolish, or
  wrong?

5
Consumer Surplus
P
D
QGuitars
6
Consumer Surplus
P
D
QGuitars
7
Consumer Surplus
Base x Height
H 300
B 1000
8
Increase in Consumer Surplus
P
Ringo
600
George
500
Paul
400
D
QGuitars
9
Producer Surplus
P
QGuitars
10
Producer Surplus
H 300
B 2000
11
Increase in Producer Surplus
P
QGuitars
12
Benevolent Dictator

• Welfare Economics
• Maximizing Human Well Being
• Pareto Optimality
• Welfare is maximized when society cannot increase
  the welfare of one person or group without
  diminishing the welfare of another.

13
Pareto Optimality
Rich
Poor
14
Pareto Optimality
15
Increasing Welfare Experiment
P
S
D
Q
Ferraris
16
Maximum Welfare

• For any good, service, or factor of production,
  the market equilibrium is the optimal price and
  quantity

• Welfare cannot be improved upon without harming
  groups not currently in this market. . .
• . . . therefore, with respect to human well-being
  as defined by most humans, the market equilibrium
  is the most efficient outcome

• The exception is externalities

17
Excise Tax, Redux
P
S
PE
D
Qyachts
18
Tax Wedge
P
S
PE
D
Q
19
Welfare Effect of a Tax
A
B
C
E
D
F
20
Welfare Matrix
Before Tax
After Tax
Net ?
Consumer Surplus
Producer Surplus
Tax Revenue
Total Surplus
21
Consumer Surplus Before Tax
P
S
A
B
C
PE
E
D
D
F
Q
22
Welfare Matrix
A B C
23
Producer Surplus Before Tax
P
S
A
B
C
PE
E
D
D
F
Q
24
Welfare Matrix
D E F
0
A B C D E F
25
Consumer Surplus After Tax
P
S
A
B
C
PE
E
D
D
F
Q
26
Welfare Matrix
A
-(B C)
27
Producer Surplus After Tax
P
S
A
B
C
PE
E
D
D
F
Q
28
Welfare Matrix
F
-(D E)
29
Revenue After Tax
P
S
A
B
C
PE
E
D
D
F
Q
30
Welfare Matrix
B D
B D
-(C E)
A B D F
31
-(C E)
P
S
A
B
C
PE
E
D
D
F
Q
32
Deadweight Loss

• Trades That Arent Made
• Consumer and Producer Surplus Not Collected
• Comparative Advantages Not Exploited
• Resources Used Below Their Highest Value

• Examples
• Unmade Trades
• Tax Avoidance Activities
• Government Waste (its not their money)

33
Power Suits
34
Revenue and Tax Size
35
Marginal Tax Rates on 30,000
Income Remaining
Tax Steps
Rate
30,000
Tax Paid
Average Tax 10
10,000
20,000
0
Marginal Tax 20
10,000
10,000
1000
10,000
0
2000
36
Marginal Tax Rates on 90,000
Income Remaining
Tax Paid
Tax Steps
Rate
90,000
Average Tax 30
80,000
0
10,000
Marginal Tax 50
70,000
10,000
1000
30,000
40,000
6000
40,000
0
20,000
37
Marginal Tax Rates on 1,000,000
Income Remaining
Tax Paid
Tax Steps
Rate
1,000,000
Average Tax 84
0
10,000
990,000
Marginal Tax 90
10,000
980,000
1000
30,000
950,000
6000
50,000
900,000
25,000
900,000
810,000
0
38
Lincoln on Slavery
Those arguments that are made, that the inferior
race are to be treated with as much allowance as
they are capable of enjoying that as much is to
be done for them as their condition will allow.
What are these arguments? They are the argument
that kings have made for enslaving people in all
ages of the world. You will find that all the
arguments in favor of kingcraft were of this
class they always bestrode the necks of the
people, not that they wanted to do it, but
because the people were better off for being
ridden. That is their argument, and this
argument of the Judge is the same old serpent
that says you work and I will eat, you toil and I
will enjoy the fruits of it. Abraham Lincoln,
Speech at Chicago, Illinois on July 10, 1858 in
Don E. Fehrenbscher, ed. Lincoln Selected
Speeches and Writings, The Library of America,
1992, p. 146.
39
Lincoln on Slavery
. . . but I hold that notwithstanding all of
this, there is no reason in the world why the
Negro is not entitled to all the natural rights
enumerated in the Declaration of Independence,
the right to life liberty and the pursuit of
happiness. I hold that he is a much entitled to
these as the white man. I agree with Judge
Douglas that he is not my equal in many respects
certainly not in color, perhaps not in moral or
intellectual endowment. But in the right to eat
the bread, with out leave of anybody else, which
his own hands earn, he is my equal and the equal
of Judge Douglas, and the equal of every living
man. Abraham Lincoln, First Lincoln Douglas
Debate at Ottawa, Illinois on August 21, 1858 in
Don E. Fehrenbscher, ed. Lincoln Selected
Speeches and Writings, The Library of America,
1992, p.149.
40
U.S. Taxes
41
U.S. Taxes
42
Laffer Curve
0
100
43
The End