Question

What does consumer surplus measure? What is the drawback to using consumer surplus as a measure of economic well-being in some markets?

Answer 1

Consumer surplus is the area under the demand curve and above the price curve. In other words the price that the consumers are paying and the price they are willing to pay for the good and service. Thus, it measures the benefit the consumers get by participating in market.

If the producer is able to understand the consumer buying behaviour then they might take advantage of it. They can price discriminate and charge a higher price from the consumers who wish to pay a higher price of the good. That is due to consumer surplus the producer can discriminate among consumers and charge different price from different consumers.

If we focus on increasing the consumer surplus then in some of the markets it does not help. For example some of the goods have negative externality on the society such as production of steel give rise to pollution which has implicit cost on the society thus a cost on the consumers therefore due to negative externality it causes a loss to the consumers. Thus, the welfare decreases.

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