Page 538 - Krugmans Economics for AP Text Book_Neat

figure 50.1

Total Surplus Price
of book
In the market for used textbooks, the equilibrium S
price is $30 and the equilibrium quantity is 1,000
books. Consumer surplus is given by the blue area,
the area below the demand curve but above the
price. Producer surplus is given by the red area, the
Consumer
area above the supply curve but below the price. surplus
The sum of the blue and the red areas is total sur- Equilibrium E
plus, the total benefit to society from the production price $30
and consumption of the good.
Producer
surplus

D

0 1,000 Quantity of books

Equilibrium quantity

But are we as well off as we could be? This brings us to the question of the efficiency
of markets.

The Efficiency of Markets
A market is efficient if, once the market has produced its gains from trade, there is no
way to make some people better off without making other people worse off. Note that
market equilibrium is just one way of deciding who consumes a good and who sells a
good. To better understand how markets promote efficiency, let’s examine some alter-
natives. Consider the example of kidney transplants discussed earlier in an FYI box.
There is not a market for kidneys, and available kidneys currently go to whoever has
been on the waiting list the longest. Of course, those who have been waiting the longest
aren’t necessarily those who would benefit the most from a new kidney.
Similarly, imagine a committee charged with improving on the market equilibrium
by deciding who gets and who gives up a used textbook. The committee’s ultimate goal
would be to bypass the market outcome and come up with another arrangement that
would increase total surplus.
Let’s consider three approaches the committee could take:
1. It could reallocate consumption among consumers.
2. It could reallocate sales among sellers.
3. It could change the quantity traded.
The Reallocation of Consumption Among Consumers The committee might try to
increase total surplus by selling books to different consumers. Figure 50.2 shows why
this will result in lower surplus compared to the market equilibrium outcome. Points A
and B show the positions on the demand curve of two potential buyers of used books,
Ana and Bob. As we can see from the figure, Ana is willing to pay $35 for a book, but
Bob is willing to pay only $25. Since the market equilibrium price is $30, under the
market outcome Ana gets a book and Bob does not.
Now suppose the committee reallocates consumption. This would mean taking the
book away from Ana and giving it to Bob. Since the book is worth $35 to Ana but only $25
to Bob, this change reduces total consumer surplus by $35 − $25 = $10. Moreover, this result
496 section 9 Behind the Demand Curve: Consumer Choice