Question

What is total surplus? Explain the following statement: net (social) benefits = total surplus – total costs. Keep in mind that a loss in either consumer or producer surplus is a social welfare loss. Net change in social welfare is measured by changes to CS or PS or both. Total surplus (i.e., net benefits) is maximized at the efficiency point.

Answer 1

Answer:Total Surplus:The total surplus in a market is a measure of the total well being of all the participants in a market.It is the sum of consumer surplus and producer surplus.Consumer surplus is the difference between willingness to pay for a good and the price that consumer actually pay for it.

Net(Social) Benefits = Total Surplus-Total Costs

Total surplus or Net Benefits is maximised at the efficiency point.

Total Surplus is maximised when the price equals the market equilibrium price.In competitive market,only the most efficient producer will be able to produce a product for less than the market price

However,Total Benefits>Total Cost will not lead to a unique solution.Since both benefit and costs will normally rise with the level of an activity,many possible levels have total benefits greater than total cost.

But Marginal Costs=Marginal Benefits will lead to the unique optimal solution.

Since Marginal Cost normally rise and marginal benefits normally decline,there will be one level of an activity at which MC=MB

Therefore,Net Benefits is most maximised at the efficiency point when MC=MB.