Efficiency & welfare

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Last updated 8:00 PM on 8/20/26
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9 Terms

1
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Willingness to Pay (WTP)


Maximum amount a consumer would pay for something.

2
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Consumer Surplus

Willingness to pay − price actually paid.

3
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Total Surplus

Consumer surplus + producer surplus.

4
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Efficiency

Resources are allocated so that total surplus is maximized.

5
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Equity

How fairly economic benefits/resources are distributed. Efficiency and equity are different concepts.

6
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Market Failure

A situation where an unregulated market does not produce an efficient allocation.

7
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Externality

A cost or benefit imposed on a third party who wasn't directly involved in the transaction.

8
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Negative Externality

Third-party cost. Example: pollution.

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Positive Externality

Third-party benefit. Example: vaccination or education can generate spillover benefits.