Chapter 5 – Welfare Analysis 1
Chapter 5
WELFARE ANALYSIS
Microeconomics in Context (Goodwin, et al.), 3rd Edition
Chapter Overview
This chapter presents welfare analysis, including the topics of consumer and producer
surplus. This chapter also includes a close examination of different ways of
understanding efficiency. Consideration of what is efficient—and for whom—is
followed by a first look at policy conclusions that have been drawn from this approach
and at the requirements for “perfect markets” that underlie traditional welfare analysis.
Objectives
After reading and reviewing this chapter, you should be able to:
1. Understand how economists define and quantify social welfare.
2. Define consumer surplus, and be able to understand it in relation to a demand
curve.
3. Define producer surplus, and be able to understand it in relation to a supply
curve.
4. Explain why a market at equilibrium maximizes the net social welfare to market
participants.
5. Discuss why a price floor or a price ceiling creates a deadweight loss.
6. Discuss the policy implications of welfare analysis, including the basis for
lasissez-faire economics and the problem of market failure.
Key Term Review
welfare economics social welfare
third-party effects maximum willingness to pay (WTP)
consumer surplus marginal change
marginal benefit (for consumers) marginal benefits curve
net benefits market (or aggregate) benefits
market consumer surplus producer surplus
marginal cost market producer surplus
social efficiency (in welfare economics) price ceiling
deadweight loss price floor
laissez-faire market failure
