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The consumer's surplus is highest at the largest number of units for which, even for the last unit, the maximum willingness to pay is not below the market price. Consumer surplus can be used as a measurement of social welfare, shown by Robert Willig. [8] For a single price change, consumer surplus can provide an approximation of changes in welfare.
The producer surplus always decreases, but the consumer surplus may or may not increase; however, the decrease in producer surplus must be greater than the increase, if any, in consumer surplus. Deadweight loss can also be a measure of lost economic efficiency when the socially optimal quantity of a good or a service is not produced.
The Ramsey problem, or Ramsey pricing, or Ramsey–Boiteux pricing, is a second-best policy problem concerning what prices a public monopoly should charge for the various products it sells in order to maximize social welfare (the sum of producer and consumer surplus) while earning enough revenue to cover its fixed costs.
The purpose of price discrimination is to transfer consumer surplus to the producer. [46] Consumer surplus is the difference between the value of a good to a consumer and the price the consumer must pay in the market to purchase it. [47] Price discrimination is not limited to monopolies.
The monopoly power possessed by a MC company means that at its profit-maximising level of production, there will be a net loss of consumer (and producer) surplus. The second source of inefficiency is the fact that MC companies operate with excess capacity.
This means that the amount of consumer surplus, the area below the demand curve and above the price, will be lower. [4] The change in overall social surplus of the market depends on whether the increase in producer surplus due to lower production costs is larger or smaller than the fall in consumer surplus due to higher prices. Note that it is ...
Higher prices. Under price discrimination, all consumers pay a higher price than in a competitive market. Some consumers also pay higher prices than in a single-price monopoly. Decline in consumer surplus. Price discrimination enables a transfer of money from consumers to sellers. Fairness.
The lump-sum fee enables the firm to capture all the consumer surplus and deadweight loss areas, resulting in higher profit than a non-price discriminating monopolist could manage. The result is a firm which is in a sense allocatively efficient (price per unit is equal to marginal cost, but total price is not) - one of the redeeming qualities ...