The Benevolent Social Planner

To evaluate market outcomes, we introduce into our analysis a new, hypothetical character called the benevolent social planner. The benevolent social planner is an all-knowing, all-powerful, well-intentioned dictator. The planner wants to maximize the economic well-being of everyone in society. What should this planner do? Should he just leave buyers and sellers at the equilibrium that they reach naturally on their own? Or can he increase economic well-being by altering the market outcome in some way?

To answer this question, the planner must first decide how to measure the economic well-being of a society. One possible measure is the sum of consumer and producer surplus, which we call Mai surplus. Consumer surplus b the benefit that buyers receive from parlicipaling in a market, and producer surplus is the benefit that sellers receive. It is therefore natural to use total surplus as a measure of society's economic well-being.

To better understand this measure of economic well-being, recall how we measure consumer and producer surplus. We define consumer surplus as

Consumer surplus - Value to buyers - Amount paid by buyers.

Similarly, we define producer surplus as

Producer surplus - Amount received by sellers - Cost to sellers.

When we add consumer and producer surplus together, we obtain

Total surplus - (Value to buyers - Amount paid by buyers)

+ (Amount received by seller» - Co*I to sellcrsj.

The amount paid by buyers equals the amount received by sellers, so the middle two terms in this expression cancel each other. As a result, we can write total surplus as

Total surplus - Value to buyers - Cost to sellers.

Total surplus in a market is the total value to buyers of the goods, as measured by their willingness to pay, minus the total cost to «Hers of providing those goods.

If an allocation of resources maximizes total surplus, we say that the allocation exhibits efficiency. If an allocation is not efficient, then some of the potential gains from trade among buyers and sellers arc not being realized. For example, an allocation is inefficient if a good is not being produced by the sellers with lowest cost. In this case, moving production from a high-cosl producer to a low-cost producer will lower the total cost to s.Hlers ami raise total surplus. Similarly, an

•fflcUncy the proporty of a nMOurc# »location of maximizing the total surpfai receded by all mambars of sooaty equality the property of distributing economic prosperity uniformly among the members of tooety allocation is inefficient if a good is not being consumed by the buyers who value it most highly. In this case, moving consumption of the good from a buyer with a low valuation to a buyer with a high valuation will raise total surplus.

In addition to efficiency, the social planner might also care about equality that is, whether the various buyers and sellers in the market have a similar level of economic well-being. In essence, the gains from trade in a market are like a pie to be shared among the market participants. The question of efficiency concerns whether the pie is as big as possible- The question of equality concerns how the pie is sliced and how the portions are distributed among members of society. In this chapter, we concentrate on efficiency as the social planner's goal. Keep in mind, however, that real policymakers often care about equality as well.

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