Chapter 5: Surplus, Efficiency, and Deadweight Loss

1. Negative-sum, zero-sum, and positive-sum environments

a. Negative-sum environment—a situation in which the sum of gains and losses

over all people is negative in value

i. E.g. heads, I lose $10 and you win $8 ($2 is burned/wasted); tails, I win

$7, you lose $9 ($2 is burned)—losses more than wins

b. Zero-sum environment—a situation in which the sum of gains and losses over all

people is equal to zero

i. E.g. heads, I lose $5, you win $5; tails, I win $3, you lose $3—cancel each

other out

c. Positive-sum environment—a situation in which the sum of gains and losses over

all people is positive in value

i. E.g. heads, I lose nothing and you win $12; tails, I win $13, you lose

nothing

2. Win-win outcomes vs. win-lose outcomes

a. Win-win outcome—an outcome for which all people are better off than they

would have been if the outcome were not realized (i.e. everybody wins)

i. Only positive in a positive sum environment

ii. Being in a positive sum environment does not guarantee that we will

realize a win-win outcome

b. Win-lose outcome—some are better off and some are worse off than they would

have been if the outcome was not realized (i.e. some people win, other people

lose)

c. Voluntary trade—in free markets in a win-win outcome in that buyers and sellers

are both better off than they would have been if trade did not occur

i. Intuition—nobody is forcing anyone to trade

3. Buyer’s reservation price—max dollar amount a buyer is willing to give up in order to

acquire an item

a. At any particular quantity demanded, the height of the demand curve illustrates

the “reservation price” of the buyer of that unit

4. Seller’s reservation price—min dollar amount a seller is willing to accept in order to part

with an item

a. At any particular quantity supplied, the height of the supply curve illustrates the

“reservation price” of the seller of that unit

b. “Benefits (or surplus) from trade” will be based upon these reservation prices

5. Consumer’s surplus and producer’s surplus

a. Situation

i. Consider an item that a buyer values at rb=$22 and a seller values at

rs=$12

1. Transfer of ownership (i.e. do not worry about the money that is

trading hands) makes the buyer $22 better off and makes the

seller $12 off (the sum of their gains/losses is $22-$12=$10,

positive sum)

ii. Suppose they agree to trade at a price of p=15