Thursday, February 28, 2019

Two Remarks on Consumer Surplus

Luis C. Corchón, Universidad Carlos III de Madrid - Department of Economics and Ramón J. Torregrosa, University of Salamanca - Department of Economics and Economic History offer Two Remarks on Consumer Surplus.

ABSTRACT: In this paper we investigate the use of consumer surplus in monopoly when the consumption of the outside good cannot be smaller than a certain number and when the weights given in the social welfare function to consumers and the firm are different. We assume quasi-linear utility and constant returns to scale. We find that when the constraint on the consumption of the outside good is binding, income effects arise in demand and profit maximizing output is below the profit maximizing output without this constraint. Moreover, standard change in consumer surplus overestimates welfare losses whenever optimal output is affected by such a constraint. When the weights given to consumers and the monopolist are not identical, first order condition of social welfare maximization does not necessarily characterize the maximum and when it does, profits might be negative. We find that a policy of offering the good at zero price might be optimal. We offer a formula to calculate welfare losses in this case.

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