Consumer Surplus, Demand Functions, and Policy Analysis,
RAND CORP SANTA MONICA CA
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Policy analysts familiar with the concept of consumer surplus typically think of it as the area under a demand curve. Consumer surplus is a monetary measure of the difference between what an individual pays for consuming a good or service and the amount he is willing to pay, given his income and the prices he faces. It is basically the net monetary benefit he receives by consuming the good. Unfortunately, except in cases most suitable for textbooks, consumer surplus can rarely be represented by simple areas under demand curves. In particular, when redistributive government policies affect consumer surplus, attempts to measure such efforts with areas under demand curves are likely to lead to severe errors. This report explains how demand functions can be used properly to measure policy-induced changes in consumer surplus. For the most part, it brings together existing results from the economics literature and presents them in a common, systematic framework. Its goal is to provide the practicing policy analyst with a rigorous and intuitive understanding of the most common measures of consumer surplus used today. The text is written for a reader with a solid introductory understanding of microeconomics--either upper-division undergraduate courses or graduate training in a professional school--and a practical familiarity with elementary calculus.
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