1. Welfare Analysis Consumer Surplus; Producer Surplus
Welfare Analysis of Tax; Welfare Analysis of Price Control

2. Economic Efficiency
A situation is economically inefficient if there is some way to change it so that so that someone gains while no one else loses.
A change is a Pareto improvement if at least one person gains and no one loses
A change is economically efficient if the winners could compensate the losers by enough to make the change a Pareto improvement.

3. Assessing Benefits Consumer Sovereignty
“Willingness to Pay” = Consumer Benefit
Consumer Surplus
“Willingness to Sell” =Opportunity Cost
Producer Surplus

4. Consumer Surplus -- Difference between Willingness to Pay and Price Paid by Buyer
Quantity P0
Demand r1 r2 r3 r4 3 5 1 2 4

5. Consumer Surplus Is Triangle Below Demand, Above Market Price.5
Quantity
Total Expenditure

6. Producer Surplus- Difference Between Opportunity Cost and Selling Price1 2 3 4 5
P0=t5 t5 t4 t3 t2 t1
Quantity

7. Producer Surplus
Price
Supply
P0=t5
Producer Surplus
Quantity

8. Consumer and Producer Surplus - Market Equilibrium
Price
Consumer Surplus
Supply P0
Demand
Producer Surplus Q0
Quantity

9. Reduce Output: Winners can not compensate losers.
Price
A - New CS
A+B+E - Old CS
C+D+F - Old PS
B+C+D - New PS
Supply A P1 B E P0 C F D
Demand
Quantity Q1 Q0
Suppliers gain B-F, but consumers lose B+E.

10. Analyze the Following Impact of Price Ceiling on Efficiency
Impact of Price Floor on Efficiency
Impact of Sales Tax on Efficiency
Impact of a Subsidy on Efficiency

11. Impact of Price Ceiling on Efficiency
A+B+C -- New CS
A+B+E -- Old CS
D -- New PS
C+D+F -- Old PS
Demand A
Supply B E
Market Clearing Price C F
Price Ceiling D
E+F is the Deadweight Loss Associated with Price Ceiling

12. Impact of Price Floor on Efficiency
A -- New CS
A+B+E -- Old CS
B+C+D -- New PS
C+F+D -- Old PS
Supply A
Price Floor B E
Market clearing price C F D
Demand Q1 Q0
E+F is deadweight loss associated with the price floor.

13. SUMMARY
Market Equilibrium is Efficient. No Deadweight Loss.
Price controls create a deadweight loss
Also, there are costs associated with rationing mechanisms, black markets etc.