Welfare Economics continued Market efficiency How to measure the total economic well-being of a society? Suppose there is a all-powerful, well-intentioned dictator called a social planner who can allocate goods among members of society. This social planner wants to maximize the welfare of everyone in society. Should the social planner allow the economy to reach an equilibrium by itself and stay there, or alter the equilibrium in some way? How to measure welfare of everyone in society? One measure is the sum of everyone’s surplus, called total surplus. This is consumer surplus plus producer surplus. Since consumer surplus measures the benefit consumers receive from participating in a market, and producer surplus measures the benefit producers receive from participating in a market, total surplus measures the sum of all individual benefits from participating in a market. Consumer surplus distortion of the market, amount paid by buyers equals amount received by sellers. So under these conditions, the total surplus equals Total surplus = total value to buyers − total cost to sellers. An allocation is efficient if it maximizes total surplus. This means that the difference between value to buyers and cost to sellers is maximized. It is maximized when every buyer whose value of a good is higher than the cost to a seller of the good, buys the good from a seller whose cost is lower than the buyer’s value. An allocation is inefficient if either a good is not being produced by sellers with lowest cost, or if it is not being bought by buyers with the highest valuation of the good. Moving production of a good fro

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Examples of inefficiency: Taxes. A fixed tax per unit traded places a wedge between what sellers receive and what buyers pay. By raising the amount per unit that buyers must pay above the equilibrium price, and lowering the amount per unit that sellers receive below the