Question

Consumer Surplus. Producer Surplus. Total Surplus. How are these concepts used to explain welfare economics? How are these concepts used to explain the benefits of trade? How are these concepts used to explain why restricting trade reduces societal wellbeing?

Answer 1

consumer surplus is the price that a consumer willing to pay at max and the actual market price. the producer surplus is the difference between market price and the producer's willingness to sell the product at its lowest price. total surplus is the addition of consumer surplus and producer surplus.

Now when we are describing welfare economics that is nothing but the transaction between consumer, producer, and the government. these three are the major player. these factors will determine the maximization f welfare and its proper justification. When producer and consumer both agree at the same price and the determined quantity then there is no deadweight loss. so the total surplus is maximized.

Now when there is an open economy with international trade the welfare concept is a bit complex. here the trade adds two types of activity with effects.

a) After the trade for exporting countries: if the country is an exporting country with a low price then the trade is most beneficial for the country and it will maximize the welfare also. when the world price is more than the domestic price then there is an increment in consumer surplus as it is shown in the figure as A and B where the producer surplus is presented by C. so in this case, the consumer will be more beneficial mostly the foreign consumers.

b) After the trade for importing countries without tariffs: in this case, the domestic country consumer will be more beneficial from international trade. they will consume more products at a low price as the world price is lower than the domestic price. so the consumer surplus will increase from A to A+B area whereas the producer surplus will be C.

c) After the trade for importing countries with tariffs: when there is an imposition of tariff the consumer surplus will decrease and there is an addition of tax revenue which will be added to the government account and the concerning part is there is two-part which shows the deadweight loss is present and that is nothing but the loss of socital wellbeing. so here the consumer surplus will reduce due to imposition of tariff and that part is the gain for the producer but in between, there is a portion of welfare goes to the government and two small portions will be considered as DWL.