Chapter 7 - Welfare Economics Flashcards
Welfare Economics
Studies how the allocation of resources affects economic well-being.
Allocation of resources
Refers to:
- how much of each good is produce
- which producers produce it
- which consumers consume it
Willingness to pay
A buyer’s WTP for a good is the maximum amount the buyer is willing to pay for that good
Measures how much the buyer values the good
Marginal buyer
The buyer who would leave the market if P we’re any higher
Consumer Surplus
Is the amount a buyer is willing to pay minus the amount the buyer actually pays
CS = WTP - P
Cost
Cost is the value of everything a seller must give up to produce a good
Seller’s willingness to sell
Marginal Seller
The seller who would leave the market if the price were any lower
Producer Surplus
The amount a seller is paid for a good minus the seller’s cost
PS = P - Cost
Total Surplus
Total Surplus = CS + PS
Total gains from trade in a market
Efficient
An allocation of resources is efficient if it maximizes total surplus. Efficiency means :
- the goods are consumed by the buyers who value them most highly
- the goods are produced by the producer with the lower costs
- raising or lowering the quantity of a good would not increase total Surplus
Market equilibrium efficiency
The market equilibrium quantity maximizes total Surplus: at any other quantity, can increase total Surplus by moving forward the market equilibrium quantity.
Laissaez faire
The notion that government should not interfere with the market
