<p>Consumer surplus in Microeconomics 101 is indeed often used in the way you describe and to illustrate a point about the allocation efficiency of a free market.</p>

<p>However, it is important to keep in mind the assumptions and limitations of the framework you describe.</p>

<p>First, the case you describe is a <strong>partial</strong> equilibrium case. This framework does not allow for such general statements as you are making about <strong>all</strong> goods always going to richer people. In partial equilibrium we look at one small market and forget about everything else. To use such a framework we must accept that it is reasonable for our question at hand to analyze one purchase in isolation. That assumption is clearly not reasonable for the question you have on all goods and as such the framework you describe cannot be used as it will lead to false conclusions.</p>

<p>With partial equilibrium we can look at this purchase in isolation from other markets. If income effects and the purchases in question are important then we cannot use the consumer surplus idea as done in Micro 101. Certainly this is an issue for the point you raise about <strong>all</strong> goods always going to a wealthier consumer. All goods cannot be analyzed with partial equilibrium.</p>

<p>The good allocation properties that economist often talk and that you mention about are based on <strong>general</strong> equilibrium and the proofs do not really involve the concept of consumer surplus.</p>

<p>To fully ensure avoidance of income issues, we often work with quasilinear utility functions when talking about consumer surplus and allocation, as you are doing. It is important, however, to keep in mind that these utility functions are special cases. They imply that income effects do not matter so they are widely used in Micro 101 for illustrative purposes.</p>

<p>Consumer surplus has a nice interpretation for quasilinear utility functions: it’s equal to the gain in utility. This makes quasilinear utility functions especially instructive. <strong>If</strong> everyone’s utility function has this form then the Pareto efficient allocations are exactly the allocations that maximize total consumer surplus (in the absence of production). </p>

<p>So when using consumer surplus to talk about efficient allocation you need to accept the assumptions that go along with quasilinear utility. However, such utility function are only realistic for certain goods and certainly not for all goods.</p>

<p>Luckily, what you learned about free markets achieving allocation efficiency is still true even when considering more complex cases. However, these results are then true for different reasons and under different assumptions than what is taught through consumer surplus in introductory lessons.</p>

CC BY-SA 4.0
2020-05-21T23:34:46.180Z
You're correct that my original question is about partial equilibria, I'm not sure what you're referring to when you talk about "general statements" that I make. But could you elaborate on how the (normative) desirability of market outcomes is measured when studying GE? The only such measure I have been taught is whether an allocation is Pareto Optimal, which is obviously a very weak measure that is of next to no use in any real-world application.
H Rogers
CC BY-SA 4.0
2020-05-21T23:44:02.917Z
So that would go beyond the scope of a single question. But what I mean with your general statements are the statements that *any* good should *always* go to the individual with the highest willingness to pay. Any statement with the word "always" is general. Further, you say "The policy objective of maximizing consumer surplus, *which follows from this idea*, must also be flawed.". That statement is general & false. The policy objective does not follow from there. Simply the CS idea is sometimes in line with that policy objective under certain circumstances relevant to introductory economics.
BB King
CC BY-SA 4.0
2020-05-21T23:51:59.647Z
At the risk of descending into pedantry, I feel forced to say that the negation of a general statement is not itself a general statement. "Ben always eats cake" is a general statement, but "Ben does not always east cake" is not, because we must only observe Ben's behaviour in one specific instance to be justified in making it. Furthermore, I'd point out that the objective of maxmizing CS is not simply an instructional artifact but a very real idea present in many current papers as well as the broader econ-pundit rhetoric. Do you have a justification for this goal?
H Rogers
CC BY-SA 4.0
2020-05-22T02:20:55.427Z
My point is simply that CS maximization *can* imply allocative efficiency of free markets, but it is not a necessary condition. The reverse implication is not generally true. Hence finding a case that invalidates CS leading to an efficient allocation does not imply that markets do not achieve efficient allocation. I am not aware of any current research papers that rely on CS for these points. I am also not qualified to speak about econ pundits. CS as used in your example serves more illustrative purposes than cutting edge scientific purposes as I understand it.
BB King
CC BY-SA 4.0
2020-05-22T12:20:39.063Z
Alright. For your reference, here are a handful of recent papers on a variety of topics that use CS in the way described:

shorturl.at/fzIV1 

shorturl.at/mDHY2

shorturl.at/jnvMO

shorturl.at/jpDG8 ///

And here’s a bit of punditry for you:
shorturl.at/mDGMN  ///

A final clarification I’ll make is that in any market, each good being sold to the consumer with the highest WTP is in fact a necessary condition for surplus maximization. My argument is that the moral grounding for surplus maximization as a measure of allocation desirability is deeply flawed.
H Rogers
CC BY-SA 4.0
2020-05-22T12:31:37.177Z
The moral grounding is as follows: The framework you discuss is only appropriate when income effects can be ignored. Your question discusses the (moral) failings of this particular framework as a result of income effects. I hope this helps.
BB King
CC BY-SA 4.0
2020-05-22T12:37:17.250Z
Ok! I guess we're in agreement then. It is strange that so many papers use this framework in cases where income effects still apply (see papers I linked). Clearly, goods such as mobile phone usage, ride sharing, and fishing access are all goods with meaningful income effects.
H Rogers
CC BY-SA 4.0
2020-05-22T12:40:01.373Z
If you want to try to address the original question and discuss an alternative measure of surplus/desirability in the presence of income effects, the bounty is still open!
H Rogers
CC BY-SA 4.0
2020-05-22T13:31:20.973Z
Just want to add; The fact that this framework is not always appropriate does not mean that the implications of the framework are wrong, because there can be other frameworks with the same conclusions (with their own other limitations and caveats). Going into that is a much broader topic and beyond a single question, since efficient allocation is the cornerstone of basically all microeconomics and hence extremely broad. Notably though, while most countries allow free prices for allocation, in a pandemic most have implemented anti-price gouging policies in line with your way of thinking.
BB King
CC BY-SA 4.0
2020-05-22T13:37:51.367Z
Lastly, to the extent that CS is used empirically it is not because CS is the main metric of a desirable outcome. It is because it is one workable and practical metric that can be useful. Of course we still must be aware of the caveats of the measures we use for empirically, but imperfect measures can still be helpful. In fact, I would argue that any empirical measure of good economic or social outcomes has caveats, as does CS.
BB King
CC BY-SA 4.0
2020-05-21T20:36:33.010Z
2020-05-22T13:34:28.930Z
2020-05-22T13:34:28.930Z
BB King
<p>First, in all the equilibrium analyses, you should consider both consumers and producers (There are special cases like pure exchange economy, which is simplified to illustrate some points). So normally, the policy objective is not to maximize consumer surplus only but to <strong>maximize consumer surplus plus producer surplus</strong>. </p>

<p>Second, the equilibria described in Micro are usually specified by a price vector, a production vector, a consumption vector, and a <strong>transfer</strong> (equivalent as a wealth redistribution/assignment/allocation). The transfer here is specifically important to your questions. With a proper transfer among the rich, the poor, and the producer (of the drug), the problem can be solved together with the assumptions in the (price, Walrasian) competitive equilibrium. </p>

<p>As you have said that Pareto optimal is actually the minimum requirement for an equilibrium outcome. An economy can have extremely high inequality among people while still be Pareto optimal. The <strong>Second Theorem of Welfare Economics</strong> solves this problem by proving that any Pareto optimal outcome can be achieved by a price equilibrium with transfers. (The Frist Theorem says that every equilibrium is Pareto optimal just for your reference.) However, there are several problems with this theorem. </p>

<p>At that time, the assumptions used in achieving this result were considered mild and reasonable. However, the assumption about complete information seems to be very unrealistic right now. Incomplete information, as well as asymmetric information, is present in every corner of the economy. There are so many to say on this issue. </p>

<p>Also, the assumption of a competitive market is also unrealistic.  Oligopoly is everywhere in the economy. As the example you mentioned, the pharmacy industry is definitely going to be an oligopoly market. In order to extract the most profit from the economy, they won't choose the production bundle that is best for all the people in the economy, so there will definitely be a shortage of new drugs. </p>

<p>Back to your question, <strong>first</strong>, it is not even a pure exchange economy in your example, and you miss the role of producers. The policy objective is not to maximize consumer surplus only. <strong>Second, under a set of assumptions, a proper transfer together with a proper price vector, a proper production bundle, would constitute the desired Pareto optimal outcome</strong>. However, how to get to that place? How to eliminate monopolistic market power while making the firms have enough incentive to innovate at the same time? Those are tough questions, and the role of information is also important in answering those questions. </p>

CC BY-SA 4.0
2020-05-22T12:26:36.930Z
For the sake of simplicity my question takes production levels as given, and examines the goal of maximizing consumer surplus. You could generalize to a model with production and look at overall surplus and the key point would still hold. You refer to a "desired Pareto optimal outcome". How would an economist evaluate which outcome is the desired one?
H Rogers
CC BY-SA 4.0
2020-05-22T12:52:17.137Z
Based on whatever principle one thinks appropriate, one can find the corresponding desired Pareto optimal outcome. The equilibrium is characterized by an **allocation**, not by whatever the economy is endowed with. So, in your example, a transfer from the rich to the poor would constitute an equilibrium which is also Pareto optimal. Taxation is serves this purpose of transfer/redistribution, but it has never been optimal nor perfect due to many reasons.
Lin Jing
CC BY-SA 4.0
2020-05-22T08:31:20.023Z
2020-05-22T08:31:20.023Z
Lin Jing
<p>An individual's willingness to pay for a good not only depends on how much they value that good, but also on their income level (at least under the conventional non-economics definition of the word 'value').</p>

<p>Consider the case with a single indivisible unit of a good and 2 consumers, a very wealthy consumer and a very poor consumer. Even if the poor consumer would benefit more from receiving the good than the wealthy consumer  (let's say the good is a drug that the poor consumer medically needs but the rich consumer wants to take recreationally), the 'efficiency-maximizing' free market will still give the good to the wealthy consumer under most conditions. The wealthier consumer has a higher willingness-to-pay not because the good is worth more to them, but because a single dollar of their wealth is worth less.</p>

<p>The normative idea that a good should always go to the individual with the highest willingness to pay is then surely flawed. The policy objective of maximizing surplus, which follows from this idea, must also be flawed. Given how glaring this problem is, I am surprised to see so many papers that still use WTP-derived consumer surplus in their normative analysis.</p>

<p>My questions are:</p>

<p>-What does the literature have to say about this issue?</p>

<p>-Have alternative measures of surplus been proposed?</p>

<p>-Is my reasoning flawed/is the measure of CS not as unfair as I am suggesting?</p>

<p>Partly inspired by some of the arguments in this thread:
<a href="https://economics.stackexchange.com/questions/34425/what-does-economics-say-about-price-gouging-during-an-emergency">What does economics say about &quot;price gouging&quot; during an emergency?</a></p>

<microeconomics><welfare-economics><consumer-surplus>
Does consumer surplus over-weigh the interests of high-income consumers?
H Rogers
# Does consumer surplus over-weigh the interests of high-income consumers?

(Asked by: username_0 on 2020-03-17)

An individual's willingness to pay for a good not only depends on how much they value that good, but also on their income level (at least under the conventional non-economics definition of the word 'value').

Consider the case with a single indivisible unit of a good and 2 consumers, a very wealthy consumer and a very poor consumer. Even if the poor consumer would benefit more from receiving the good than the wealthy consumer (let's say the good is a drug that the poor consumer medically needs but the rich consumer wants to take recreationally), the 'efficiency-maximizing' free market will still give the good to the wealthy consumer under most conditions. The wealthier consumer has a higher willingness-to-pay not because the good is worth more to them, but because a single dollar of their wealth is worth less.

The normative idea that a good should always go to the individual with the highest willingness to pay is then surely flawed. The policy objective of maximizing surplus, which follows from this idea, must also be flawed. Given how glaring this problem is, I am surprised to see so many papers that still use WTP-derived consumer surplus in their normative analysis.

My questions are:

-What does the literature have to say about this issue?

-Have alternative measures of surplus been proposed?

-Is my reasoning flawed/is the measure of CS not as unfair as I am suggesting?

Partly inspired by some of the arguments in this thread:
[What does economics say about "price gouging" during an emergency?](https://economics.stackexchange.com/questions/34425/what-does-economics-say-about-price-gouging-during-an-emergency)

**Tags:** microeconomics, welfare-economics, consumer-surplus


---

## 2 answers

### Answer by username_1 on 2020-05-21. Score: 1

Consumer surplus in Microeconomics 101 is indeed often used in the way you describe and to illustrate a point about the allocation efficiency of a free market.

However, it is important to keep in mind the assumptions and limitations of the framework you describe.

First, the case you describe is a **partial** equilibrium case. This framework does not allow for such general statements as you are making about **all** goods always going to richer people. In partial equilibrium we look at one small market and forget about everything else. To use such a framework we must accept that it is reasonable for our question at hand to analyze one purchase in isolation. That assumption is clearly not reasonable for the question you have on all goods and as such the framework you describe cannot be used as it will lead to false conclusions.

With partial equilibrium we can look at this purchase in isolation from other markets. If income effects and the purchases in question are important then we cannot use the consumer surplus idea as done in Micro 101. Certainly this is an issue for the point you raise about **all** goods always going to a wealthier consumer. All goods cannot be analyzed with partial equilibrium.

The good allocation properties that economist often talk and that you mention about are based on **general** equilibrium and the proofs do not really involve the concept of consumer surplus.

To fully ensure avoidance of income issues, we often work with quasilinear utility functions when talking about consumer surplus and allocation, as you are doing. It is important, however, to keep in mind that these utility functions are special cases. They imply that income effects do not matter so they are widely used in Micro 101 for illustrative purposes.

Consumer surplus has a nice interpretation for quasilinear utility functions: it’s equal to the gain in utility. This makes quasilinear utility functions especially instructive. **If** everyone’s utility function has this form then the Pareto efficient allocations are exactly the allocations that maximize total consumer surplus (in the absence of production).

So when using consumer surplus to talk about efficient allocation you need to accept the assumptions that go along with quasilinear utility. However, such utility function are only realistic for certain goods and certainly not for all goods.

Luckily, what you learned about free markets achieving allocation efficiency is still true even when considering more complex cases. However, these results are then true for different reasons and under different assumptions than what is taught through consumer surplus in introductory lessons.

> **Comments:**
> **username_0**: You're correct that my original question is about partial equilibria, I'm not sure what you're referring to when you talk about "general statements" that I make. But could you elaborate on how the (normative) desirability of market outcomes is measured when studying GE? The only such measure I have been taught is whether an allocation is Pareto Optimal, which is obviously a very weak measure that is of next to no use in any real-world application.  
> **username_1**: So that would go beyond the scope of a single question. But what I mean with your general statements are the statements that *any* good should *always* go to the individual with the highest willingness to pay. Any statement with the word "always" is general. Further, you say "The policy objective of maximizing consumer surplus, *which follows from this idea*, must also be flawed.". That statement is general & false. The policy objective does not follow from there. Simply the CS idea is sometimes in line with that policy objective under certain circumstances relevant to introductory economics.  
> **username_0**: At the risk of descending into pedantry, I feel forced to say that the negation of a general statement is not itself a general statement. "Ben always eats cake" is a general statement, but "Ben does not always east cake" is not, because we must only observe Ben's behaviour in one specific instance to be justified in making it. Furthermore, I'd point out that the objective of maxmizing CS is not simply an instructional artifact but a very real idea present in many current papers as well as the broader econ-pundit rhetoric. Do you have a justification for this goal?  
> **username_1**: My point is simply that CS maximization *can* imply allocative efficiency of free markets, but it is not a necessary condition. The reverse implication is not generally true. Hence finding a case that invalidates CS leading to an efficient allocation does not imply that markets do not achieve efficient allocation. I am not aware of any current research papers that rely on CS for these points. I am also not qualified to speak about econ pundits. CS as used in your example serves more illustrative purposes than cutting edge scientific purposes as I understand it.  
> **username_0**: Alright. For your reference, here are a handful of recent papers on a variety of topics that use CS in the way described:  shorturl.at/fzIV1   shorturl.at/mDHY2  shorturl.at/jnvMO  shorturl.at/jpDG8 ///  And here’s a bit of punditry for you: shorturl.at/mDGMN  ///  A final clarification I’ll make is that in any market, each good being sold to the consumer with the highest WTP is in fact a necessary condition for surplus maximization. My argument is that the moral grounding for surplus maximization as a measure of allocation desirability is deeply flawed.  
> **username_1**: The moral grounding is as follows: The framework you discuss is only appropriate when income effects can be ignored. Your question discusses the (moral) failings of this particular framework as a result of income effects. I hope this helps.  
> **username_0**: Ok! I guess we're in agreement then. It is strange that so many papers use this framework in cases where income effects still apply (see papers I linked). Clearly, goods such as mobile phone usage, ride sharing, and fishing access are all goods with meaningful income effects.  
> **username_0**: If you want to try to address the original question and discuss an alternative measure of surplus/desirability in the presence of income effects, the bounty is still open!  
> **username_1**: Just want to add; The fact that this framework is not always appropriate does not mean that the implications of the framework are wrong, because there can be other frameworks with the same conclusions (with their own other limitations and caveats). Going into that is a much broader topic and beyond a single question, since efficient allocation is the cornerstone of basically all microeconomics and hence extremely broad. Notably though, while most countries allow free prices for allocation, in a pandemic most have implemented anti-price gouging policies in line with your way of thinking.  
> **username_1**: Lastly, to the extent that CS is used empirically it is not because CS is the main metric of a desirable outcome. It is because it is one workable and practical metric that can be useful. Of course we still must be aware of the caveats of the measures we use for empirically, but imperfect measures can still be helpful. In fact, I would argue that any empirical measure of good economic or social outcomes has caveats, as does CS.  

---

### Answer by username_2 on 2020-05-22. Score: 0

First, in all the equilibrium analyses, you should consider both consumers and producers (There are special cases like pure exchange economy, which is simplified to illustrate some points). So normally, the policy objective is not to maximize consumer surplus only but to **maximize consumer surplus plus producer surplus**.

Second, the equilibria described in Micro are usually specified by a price vector, a production vector, a consumption vector, and a **transfer** (equivalent as a wealth redistribution/assignment/allocation). The transfer here is specifically important to your questions. With a proper transfer among the rich, the poor, and the producer (of the drug), the problem can be solved together with the assumptions in the (price, Walrasian) competitive equilibrium.

As you have said that Pareto optimal is actually the minimum requirement for an equilibrium outcome. An economy can have extremely high inequality among people while still be Pareto optimal. The **Second Theorem of Welfare Economics** solves this problem by proving that any Pareto optimal outcome can be achieved by a price equilibrium with transfers. (The Frist Theorem says that every equilibrium is Pareto optimal just for your reference.) However, there are several problems with this theorem.

At that time, the assumptions used in achieving this result were considered mild and reasonable. However, the assumption about complete information seems to be very unrealistic right now. Incomplete information, as well as asymmetric information, is present in every corner of the economy. There are so many to say on this issue.

Also, the assumption of a competitive market is also unrealistic. Oligopoly is everywhere in the economy. As the example you mentioned, the pharmacy industry is definitely going to be an oligopoly market. In order to extract the most profit from the economy, they won't choose the production bundle that is best for all the people in the economy, so there will definitely be a shortage of new drugs.

Back to your question, **first**, it is not even a pure exchange economy in your example, and you miss the role of producers. The policy objective is not to maximize consumer surplus only. **Second, under a set of assumptions, a proper transfer together with a proper price vector, a proper production bundle, would constitute the desired Pareto optimal outcome**. However, how to get to that place? How to eliminate monopolistic market power while making the firms have enough incentive to innovate at the same time? Those are tough questions, and the role of information is also important in answering those questions.

> **Comments:**
> **username_0**: For the sake of simplicity my question takes production levels as given, and examines the goal of maximizing consumer surplus. You could generalize to a model with production and look at overall surplus and the key point would still hold. You refer to a "desired Pareto optimal outcome". How would an economist evaluate which outcome is the desired one?  
> **username_2**: Based on whatever principle one thinks appropriate, one can find the corresponding desired Pareto optimal outcome. The equilibrium is characterized by an **allocation**, not by whatever the economy is endowed with. So, in your example, a transfer from the rich to the poor would constitute an equilibrium which is also Pareto optimal. Taxation is serves this purpose of transfer/redistribution, but it has never been optimal nor perfect due to many reasons.  

---

