Question

Define social surplus and deadweight loss. Provide examples and explain your answer.

Answer 1

Ans) The difference between the price a consumer is willing to pay and the price he actually pays is called consumer surplus. Here the price that consumer is willing to pay is higher than the price he pays.

The difference between the price that seller is willing to accept and the price that he gets is producer surplus. Here the price that he is willing to accept is lower than the price that he receives.

The total of producer surplus and consumer surplus is known as social surplus. This reflects total gain to the society.

Deadweight loss is the loss in economic efficiency occurring when market equilibrium is not reached. It is cost to the society due to market inefficiency. This leads to wastage of resources. Here both consumer and producer are at loss.

For eg÷ Suppose the market equilibrium price of a product is $30. While consumer was willing to pay upto $40 and producer is willing to accept minimum $15. There fore consumer surplus is $10 ($40-$30) while producer surplus is $15 ($30-$15). And social surplus is $10 + $15 = $25.

Now suppose government imposes price ceiling, which lowers the producer surplus due to reduced revenue because the difference between the price he is willing to accept and the price he actually gets is lower than the market equilibrium price. Also the consumer surplus is lowered because people are not able to receive as much as they demand. Although those who are able to get the product, receive more consumer surplus than in market equilibrium.

Due to reduced revenue, quantity supplied is less and demand is still high. Creating deadweight loss to the society.

Covsumes Suapls Price Dead Loss +&uilibotum prie Pemand Shotioge tQundty produces Suplus
Here P0 is equilibrium price while P1 is price ceiling
Dead Loss onsumed Consumes |Susplus Suaplus POnduces Suplus Poice CeftR-g Preduce Supley ShORTAGE Check Ups Check ups Case () Pce Ca Case &uttum Poice Psce