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Economic Efficiency, Government Price Setting,Taxes
● amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
● measures the benefit a buyer receives from participating in a market
● amount a seller is paid for a good minus the seller's cost of providing it
● measures the benefit a seller receives from participating in the market
RED = CONSUMER SURPLUS
PURPLE = PRODUCER SURPLUS
Is Outcome of Perfectly Competitive Market Desirable?
Pareto efficiency: an allocation of resources is efficient if no one can be made better off without making
someone else worse off
Another definition of efficiency: An allocation of resources is efficient if it maximizes total surplus, where total
surplus is the sum of consumer surplus and producer surplus
1. Supply of goods is allocated to buyers who value them most highly
2. demand for goods is allocated to sellers who can produce them at the least cost
3. quantity produced is the one that maximizes total surplus
Total surplus = value to buyers - cost of sellers
“With perfect competition and absent externalities, the market achieves an allocation such that if we want to
increase someone’s welfare we have to decrease someone else’s”