Consumer surplus

Consumer surplus as the difference between what consumers would be willing to pay for a good and the price they actually pay. 

Social or aggregate surplus as the sum of the consumer surplus and the producer surplus. It is the inherent value of the good, the benefit that society receives from the innovation. 

The distortions that patents provoke were reviewed recently by Kremer.14 Monopoly prices create both static and dynamic distortions. On the one hand, some consumers will not be able to pay prices that are fixed above the marginal cost in order to recover the investment in R D. On the other hand, potential investors will not necessarily take the consumer surplus into account when they decide to carry out research projects. The value of a patent - and in this case of a pharmaceutical - may be very different for different consumers, but price discrimination is impossible. The industry may shelve certain projects owing to the lack of a satisfactory return, because of the difficulty of price discrimination. Kremer even claims that the welfare loss due to monopoly prices is in the region of a quarter of the sum of the profits and the consumer surplus. Other authors, such as Giiell and Fischbaum,15 estimate welfare loss as being around 60 per cent of the sales figure. 

Kremer s proposal, like those of Giiell and Fischbaum, stands midway between patents and grants.24 One of the objections raised by The Economist to Kremer s proposal is that the government would end up paying more than the consumer surplus and the welfare loss (triangles ABC and pp1 A in Figure 2.1). In the face of this situation, the new method would be clearly detrimental because it would force a tax increase to pay for the patent. Furthermore, the international nature of patents would require the existence of some kind of international coordination, not an easy task to accomplish. We are dealing, therefore, with a theoretical proposal that needs further contributions. 

The production efficiency properties of PCR are complemented by its allocation efficiency, as under certain restrictive conditions, the resulting price structure can in the long term converge with that of Ramsey prices, that is, it provides a solution to a problem of consumer surplus maximization... 

The results regarding the retail price of the product, the quantity sold in each market, the consumer surplus (CS), the producer surplus (entrepreneur s profit) and the social surplus (the sum of the previous two surpluses) as a consequence of establishing either a single price or discriminatory prices are shown in Table 5.2 and Figure 5.1. 

Comparing the two situations, we find that the social surplus is greater when the producers practise price discrimination than when they establish a uniform price for both markets. The same happens with the level of production and the total consumer surplus. Note that the overall profit is the same in both systems, so the producer should have no preference for one or another type of pricing (they recover the sunk cost of 500 monetary units in both... 

Mandates have several justifications. Absent mandates, health plans may have an insufficient incentive to cover vaccines. Such coverage may not be demanded because individuals do not take account of the health and financial externalities in their purchase decisions (Summers 1989). Also, people may underestimate the probability of contracting various diseases (Jensen and Morrisey 1999). Vaccines are more likely to interfere with the spread of the disease than are drug treatments. As the probability of contracting a disease falls, fewer persons maybe expected to demand to be vaccinated for the disease. Also, market power of sellers of vaccines may be lower than for drug treatments. With drugs, persons who may benefit from the treatment are identifiable to sellers, thus allowing firms to extract consumer surplus... 

McGuire (2003) showed that setting the vaccine price equal to mean benefit will elicit the socially efficient level of R D on vaccines. Although this is an efficient solution, it may be subject to criticism on equity grounds. The entire net benefit accrues to manufacturers as profit, and no consumer surplus accrues to the public. McGuire assumed a fully effective vaccine. Benefit should be scaled to reflect the extent to which a vaccine is partially effective. 

An alternative approach focuses on consumer welfare. The product price is set to maximize expected consumer surplus, the difference between benefit and price. To maximize this difference, price must be lower than the mean benefit. However, by lowering price, manufacturers spend less on R D. Thus, there is a reduced probability that the new vaccine will become available. McGuire (2003, p. 214) derived an expression for the optimal division of surplus between consumers and producers at the price that maximizes consumer net benefit ... 

Setting the subsidy to social value or the lesser value reflecting the price that maximizes consumer surplus would reduce some political opposition to a subsidy. In effect, the internalities would be paid from public rather... 

First, drug treatments are sold after the firm has learned who has contracted the disease in the case of heterogeneous consumers who vary with respect to the probability of contracting the disease, there is less asymmetric information to prevent the firm from extracting consumer surplus with drug treatments than with vaccines. Since a prescription is written, the firm... 

This is not the only sector in which regulation is subject to supply disruptions. The electrical power industry is another example (loskow 1989). In general, a solution is to set payment over cto the extent that quality is a concern (Laffont and Tirole 1993 p. 233). Ceteris paribus, this will raise the returns to the manufacturers relative to the consumer surplus. 

The objective of efforts to assess the economic consequences of pollution-induced materials damages is to estimate differences in the sums of consumer surpluses and producer quasi-rents over two or more policy-relevant pollution levels. Consumer surplus portrays the difference between the maximum a representative consumer would be willing to commit himself to pay for a given quantity of a... 

There are two routes whereby pollution-induced materials damages can influence his behavior, thus altering the consumer surplus he... 

Given that producers and consumers have already adapted so as to minimize their prospective losses, or to maximize their prospective gains. Figure 2 depicts for a predetermined time interval one example of the changes an air pollution increase can have upon consumer surplus and producer quasi-rent. The air pollution increase reduces the desirable properties of the output, making smaller the consumer s w llingijiess-to-pay and causing his demand... 

Market price for the output drops from P to P, partly because of the greater relative magnitude of the shift in the demand function, and partly becajjse of its lesser relative slope. Consumer surplus was the area it is now the area dP e. Producer quasi-rent... 

For example, if the demand curve shifts to D rather than D , market price will rise to P . If the supply shift from S to S is small enough, producers could thus actually see an increase in their quasi-rents. Qualitative results are unchanged, however alterations in producer quasi-rents and consumer surplus result from the pollution-caused changes in the two sectors. These two examples serve to illustrate the issues of concern here consumers and producers can bear very different economic gains or losses depending on the relative shifts of the demand and supply functions. Moreover, the distribution of these economic consequences can differ drastically with the slope of the demand function relative to the slope of the supply function. 

Implicit in the discussion immediately above is the assumption that the firm is forever locked into a particular production process and output bundle. However, the air pollution increase may differentially affect the production and the user costs of alternative processes and bundles. The firm will substitute toward the least costly alternative. Brick rather than painted wood may now, for example, enclose the firm s offices. A complete assessment of the quasi-rent consequences of the air pollution increase for the firm requires that these induced technical changes as well as production and user cost changes be taken into account. As Figure 2 demonstrates, these changes for the firm will also have consumer surplus consequences. 

The concept of benefits is usually narrow, confined to reduced costs to producers and consumers so that analytic tools such as consumers surplus can be used. Finally, it is difficult to define and measure outcomes using this approach, since for policy assessment purposes these outcomes should be conceived as full social costs and benefits to the Nation. 

The second, more recent study (17) analyzed the costs and benefits of selected NASA Technology Utilization Office activities and, therefore, is also an operational assessment. Unlike the first study, however, both information dissemination and applications projects were studied and, in the case of the applications projects, the technologies had not yet reached the market. Two information projects and nine applications projects were analyzed. Again, the basic conceptual approach to benefits calculations was consumers surplus. Of particular interest here is the technique used to arrive at estimates of cost savings, and thus benefits, when no sales or market penetration data exist. (The general procedure is discussed on pp. 103-123.) First, market size estimates were made, then estimates of the costs, performance, and market penetration of each project technology and competing... 

First, the researchers estimated the response of the photovoltaic supply industry to the various alternatives by using data from three different sources a workshop of photovoltaic industry representatives, an assessment by an independent market research firm with photovoltaic experience, and a joint SERI/Jet Propulsion Laboratory analysis of the photovoltaic industry. Market estimates were derived from reviews and comparison of several available market studies and from a workshop attended by representatives of potential buyers in selected markets. Then, using a consumers surplus approach to calculate benefits, the authors used changes in price and quantity estimates attributed to the initiative to calculate the expected marginal net benefits of the initiative. Because of uncertainties in the size of potential intermediate markets, the effectiveness of the initiative was analyzed under a range of possible market scenarios. 

---