Measuring Welfare Loss

1
Measuring Welfare Loss

• From Government Intervention

2
Consider a Demand Curve
He would be willing to pay at most 3 for the
second candy bar
The third candy bar is worth at least 2
This consumer would be willing to pay at most 4
for the first candy bar
He would be willing to pay at most 2 for the
third candy bar
4
3
The first candy bar is worth at least 4 to him
2
The second candy bar is worth at least 3
1
1
2
3
4
3
Consider a Demand Curve
This consumer will get the first candy bar which
is worth at least 4 to him for only 2!
This consumer will get the second candy bar which
is worth at least 3 to him for only 2!
This consumer will get the third candy bar which
is worth at least 2 to him for 2
1
A consumer surplus of 4 - 2 2
A consumer surplus of 3 - 2 1
A consumer surplus of 2 - 2 0
Total consumer surplus 2 10 3
If candy bars are sold for 2/unit
4
Consumer Surplus

• The difference between the market price and what
  people are willing to pay for a unit of output

5
Consider a Supply Curve
If candy bars are sold for 2/unit
2
1.50
This producer is willing to sell the third unit
for no less than 1.50
1
This producer is willing to sell the fourth unit
for no less than 2
0.50
He is willing to sell the second unit for no less
than 1
This producer is willing to sell the first unit
for no less than 0.5
1
2
3
4
6
Producer Surplus
If candy bars are sold for 2/unit
PS 1.5 (2 0.5)
PS 1 (2 1)
PS 0.5 (2 1.5)
PS 0 (2 2)
Total Producer Surplus 1.5 1 0.5 0 3
7
Producer Surplus

• The difference between the market price and the
  cost of producing the good.

8
Measuring Welfare

S
C S
P2
P S
D
4
Q
9
The Effect of a Price Ceiling
Gain to consumer
Loss to Consumer
3
S
2
1
D
4
2
10
The Effect of a Price Ceiling
Loss to Producer
S
3
2
1
D
4
2
11
A subsidy to Consumers and a Tax to Producers
12
Welfare Loss

S
C S
P2
P S
1
D
4
Q
13
Welfare Loss From a Tax

S
C S
3
P2
1
D
4
Q