(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 343

318 PART 2 ã Producers, Consumers, and Competitive Markets

In Đ2.7, we explain that
under price controls, the
price of a product can be
no higher than a maximum
allowable ceiling price.

is a shortage—i.e., excess demand. Of course, those consumers who can still
buy the good will be better off because they will now pay less. (Presumably,
this was the objective of the policy in the first place.) But if we also take into
account those who cannot obtain the good, how much better off are consumers
as a whole? Might they be worse off? And if we lump consumers and producers together, will their total welfare be greater or lower, and by how much? To
answer questions such as these, we need a way to measure the gains and losses
from government interventions and the changes in market price and quantity
that such interventions cause.
Our method is to calculate the changes in consumer and producer surplus
that result from an intervention. In Chapter 4, we saw that consumer surplus
measures the aggregate net benefit that consumers obtain from a competitive
market. In Chapter 8, we saw how producer surplus measures the aggregate net
benefit to producers. Here we will see how consumer and producer surplus can
be applied in practice.

Review of Consumer and Producer Surplus
For a review of consumer
surplus, see §4.4, where it
is defined as the difference
between what a consumer is
willing to pay for a good and
what the consumer actually
pays when buying it.

In an unregulated, competitive market, consumers and producers buy and sell
at the prevailing market price. But remember, for some consumers the value of
the good exceeds this market price; they would pay more for the good if they had
to. Consumer surplus is the total benefit or value that consumers receive beyond
what they pay for the good.
For example, suppose the market price is $5 per unit, as in Figure 9.1. Some
consumers probably value this good very highly and would pay much more
than $5 for it. Consumer A, for example, would pay up to $10 for the good.
However, because the market price is only $5, he enjoys a net benefit of $5—the
$10 value he places on the good, less the $5 he must pay to obtain it. Consumer
B values the good somewhat less highly. She would be willing to pay $7, and

Price

F IGURE 9.1

$10

Consumer
Surplus

CONSUMER AND PRODUCER SURPLUS
Consumer A would pay $10 for a good whose market price is $5 and therefore enjoys a benefit of $5.
Consumer B enjoys a benefit of $2, and Consumer C, who values the good at exactly the market
price, enjoys no benefit. Consumer surplus, which
measures the total benefit to all consumers, is the
yellow-shaded area between the demand curve
and the market price. Producer surplus measures
the total profits of producers, plus rents to factor

inputs. It is the green-shaded area between the
supply curve and the market price. Together, consumer and producer surplus measure the welfare
benefit of a competitive market.

S

7

5

Producer
Surplus

D
Q0

Consumer A

Consumer B

Consumer C

Quantity