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Gains From Trade

Consumer Surplus

Quantifying Welfare E ects

Producer Surplus

Welfare in Equilibrium

Measuring Gains From Trade

Q: How can we put a dollar value on

  • a)

    the welfare gains resulting from a trade, or

  • b)

    the change in consumer welfare resulting from a price/policy

change?

A:

  • a)

    Consumer and Producer Surplus are monetary approximations of gains from trade for consumers & producers, respectively. (Benefits - Costs)

  • b)

    We have three measures of the effects of a policy or price change on consumer welfare:

1

Change in Consumer Surplus

2

Compensating Variation

3

Equivalent Variation

Only in special circumstances do these three measures coincide.

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