consumer, producer and community surplus

Consumer, Producer and Community Surplus

• How much would you be willing to pay for this?

• Or this?

Consumer SurplusConsumer surplus The difference

between the highest price a consumer is willing to pay and the price the consumer actually pays.

Producer SurplusProducer surplus The difference between the lowest price a firm would have been willing to accept and the price it actually receives.

Community Surplus of Competitive Markets

Community Surplus Equals the Sum of Consumer Surplus and Producer Surplus

Economic efficiency

Occurs where the sum of consumer surplus and producer surplus is at a maximum.

The incidence of taxation on Community

Surplus

Deadweight welfare loss froman indirect tax

Deadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

Before-taxsituation

O

S

£

Q

D

P1

Q1

Before-taxsituation

Deadweight loss from an indirect tax

Consumersurplus

O

S

£

Q

D

P1

Q1

Consumersurplus

Producersurplus

Before-taxsituation

Deadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

P2 - tax

Deadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

1

2 34

6

5P2 - tax

Deadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

1

2 34

6

5P2 - tax

Deadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

1

2 34

6

5P2 - tax

Deadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

1

2 34

6

5P2 - tax

Tax revenuefor government

Deadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

1

2 34

6

5P2 - tax

Deadweightloss from tax

Deadweight loss from an indirect tax