Welfare Economics Review

These flashcards cover key vocabulary related to welfare economics, consumer surplus, producer surplus, and economic efficiency.

Welfare Economics

A branch of economics that focuses on the well-being of individuals and society, analyzing how resources are allocated to optimize economic and social welfare.

Allocative Efficiency (A.E.)

A situation where resources are distributed in such a way that maximizes total benefit to society.

During Allocative Efficiency who buys (consumes) the good?

Buyers with highest WTP

During Allocative Efficiency who produces (sells) the good?

Sellers with lowest WTA

Consumer Surplus (CS)

WTP - Price. How “well off” consumers are. Area under D-Curve and above P, remember formula ½ b * h. NOT THE SAME as Surplus from Qs > Qd

Producer Surplus (PS)

Price - WTA, area under P and above S-Curve.

Total Surplus (TS)

CS + PS, or WTP - WTA, or ½ b * h

Area of Triangle (A= ½ Base x Height)

The formula to find the area of a triangle, used in determining consumer and producer surplus graphs.

Negative Consumer Surplus

Occurs when the price of a good is higher than a consumer's willingness to pay, resulting in a loss. Won’t want to buy in this case

Equilibrium Efficiency

A state where supply meets demand (P, Q) and total surplus is maximized.

In order for efficiency:

Highest WTP buyers buy, lowest WTA sellers sell, increase or decrease in Q wouldn’t increase TS.

Marginal Seller

The seller who is just willing to sell at the current market price.

Marginal Buyer

The buyer who is just willing to buy at the current market price.

Rationing Devices

Methods used to allocate scarce resources, which can affect buyer behavior and market efficiency.

When is TS largest?

When WTP is largest and WTA is smallest