Answer to Question #65359 in Microeconomics for Melissa Edgerton

Question

The government is considering implementing a policy that would increase consumer surplus by $24 million and decrease producer surplus by $31 million in a particular market. Consumers in this market are a particularly disadvantaged group (e.g., poor), while producers are a particularly advantaged group (e.g., rich). The social weight on these consumers is 1.4 and the social weight on these producers is 1.
a. Calculate the unweighted change in total surplus resulting from this policy, and calculate the distributionally-weighted change in total surplus resulting from this policy.
b. Is this policy worthwhile from a social perspective, and why or why not? (Be sure to address both efficiency and equity in your answer.)

Answer 1

The government is considering implementing a policy that would increase consumer surplus by $24 million and decrease producer surplus by $31 million in a particular market. Consumers in this market are a particularly disadvantaged group (e.g., poor), while producers are a particularly advantaged group (e.g., rich). The social weight on these consumers is 1.4 and the social weight on these producers is 1.
a. The unweighted change in total surplus resulting from this policy is $31 - $24 = $7 million.
b. This policy is not worthwhile from a social perspective, because even the consumer surplus would increase, the total surplus would decrease, which will cause the deadweight loss in the market.