Consumer, Producer and
Community Surplus
• How much would you be willing to pay for this?
• Or this?
Consumer Surplus
Consumer surplus The difference
between the highest price a consumer
is willing to pay and the price the
consumer actually pays.
Producer Surplus
Producer surplus
The difference between the lowest price a firm would have
been willing to accept and the price it actually receives.
Community Surplus of Competitive Markets
Economic efficiency
Occurs where the sum of consumer surplus and producer surplus is at
a maximum.
Community Surplus Equals the
Sum of Consumer Surplus and
Producer Surplus
The incidence of taxation
on Community Surplus
Deadweight welfare loss from
an indirect tax
Deadweight loss from an
indirect tax
£
S
Before-tax
situation
P1
D
O
Q1
Q
£
Deadweight loss from an
indirect tax
S
Consumer
surplus
Before-tax
situation
P1
D
O
Q1
Q
£
Deadweight loss from an
indirect tax
S
Consumer
surplus
Before-tax
situation
P1
Producer
surplus
D
O
Q1
Q
£
Deadweight loss from+ an
tax
indirect tax
S
S
P2
P1
P2 - tax
D
O
Q2
Q1
Q
£
Deadweight loss from an
+ tax
indirect tax
S
S
1
P2
P1
P2 - tax
2
3
4
5
6
D
O
Q2
Q1
Q
£
Deadweight loss from+ an
tax
indirect tax
S
S
1
P2
P1
P2 - tax
2
3
4
5
6
D
O
Q2
Q1
Q
£
Deadweight loss from an
+ tax
indirect tax
S
S
1
P2
P1
P2 - tax
2
3
4
5
6
D
O
Q2
Q1
Q
£
Deadweight loss from an
+ tax
indirect tax
S
Tax revenue
for government
S
1
P2
P1
P2 - tax
2
3
4
5
6
D
O
Q2
Q1
Q
£
Deadweight loss from an
+ tax
indirect tax
S
Deadweight
loss from tax
S
1
P2
P1
P2 - tax
2
3
4
5
6
D
O
Q2
Q1
Q