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Welfare economics is the branch of economics that studies how economic activities and policies affect the well-being of individuals and society. It analyses efficiency and equity and aims at maximising social welfare.
Consumer surplus is the difference between what a consumer is willing to pay for a commodity and what he actually pays (market price).
Example idea: If a consumer is willing to pay ₹100 but pays ₹70, consumer surplus = ₹30.
In a demand-supply diagram, consumer surplus is represented by the area:
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Welfare economics is the branch of economics that studies how economic activities and policies affect the well-being of individuals and society. It analyses efficiency and equity and aims at maximising social welfare.
Consumer surplus is the difference between what a consumer is willing to pay for a commodity and what he actually pays (market price).
Example idea: If a consumer is willing to pay ₹100 but pays ₹70, consumer surplus = ₹30.
In a demand-supply diagram, consumer surplus is represented by the area:
Market failure occurs when free market mechanism fails to allocate resources efficiently, leading to loss of social welfare. In such cases, government intervention may be required.
Externality is the effect of one person’s or firm’s activity on others that is not reflected in market prices.
Types:
Similarly:
Public goods are goods that are:
Examples: national defence, street lighting, public roads (basic).
Because public goods are non-excludable, people may enjoy benefits without paying (free riding). This leads to under-provision by private market and creates market failure.
From this topic
Consumer surplus is the difference between maximum price a consumer is willing to pay and the market price actually paid. It measures consumer welfare and benefit from consumption. It is useful for government in taxation, subsidies and price control decisions and is also used in cost-benefit analysis and project evaluation to estimate social benefits.
Consumer surplus has limitations because willingness to pay is difficult to measure accurately. It assumes utility can be measured in money terms and that marginal utility of money remains constant, which may not be true. It also ignores qualitative factors and preference changes and may vary with income differences among consumers.
Consumer surplus is the difference between the maximum price a consumer is willing to pay for a commodity and the price actually paid. It represents the extra benefit or satisfaction received by consumers because they pay a market price lower than their willingness to pay.
Measurement: Consumer surplus can be measured with the help of the demand curve. At a given market price, consumers purchase a certain quantity. The area under the demand curve up to that quantity shows total willingness to pay, while the rectangle under the price line shows total expenditure. The difference between these two areas (area under demand curve above price line) represents consumer surplus.
Importance: Consumer surplus is a measure of consumer welfare and helps evaluate benefits of consumption. It is useful for government in policy decisions such as taxation, subsidies, price control and public provision. It is also useful in cost-benefit analysis to assess social benefits of projects and welfare changes due to price changes.
Limitations: It assumes utility can be measured in money terms and that marginal utility of money is constant, which may not be true. Willingness to pay is difficult to measure accurately. Consumer surplus also ignores qualitative aspects, changes in tastes and preference differences among consumers.
Thus consumer surplus is a useful welfare concept but has limitations due to measurement and assumptions.