Taking Consumer Surplus Seriously
By David Henderson
In a comment on my December 21 post, “John Papola on Behavioral Economics,” John Papola wrote:
[W]hat is consumer surplus really and why does anyone take such an idea seriously?
As someone who takes it seriously–I don’t know of any economist who doesn’t–I want to explain (1) what consumer surplus is and (2) why I take it seriously.
Consumer surplus is the difference between the maximum amount the consumer is willing to pay and the amount he actually pays. As such, it’s simply a measure of the consumer’s gain from trade. That’s what it is.
Now, why do we take it seriously? There are many reasons. One is that we realize that we can’t simply use GDP as a measure of well-being. Let’s say someone comes along and radically changes technology so something that was priced positively is now given away. That component of GDP will fall because a zero price times a positive quantity, no matter how large, is zero. But consumer surplus will rise.
Another reason–this is one of my reasons and not all economists will share it–is that it’s a way of celebrating our gains from trade. When I teach the concept in class, I tell a consumer surplus story from my life. It’s too long to tell here and so I’ll tell it as a separate post later this week.
A final reason (this list is by no means complete) is that it explains why so many of us who hate what the TSA is doing put up with it. Think of an important trip I want to make that’s over 1000 miles. Now consider the consumer surplus I get from flying rather than driving. It’s immense. So I don’t want to mess with TSA: I don’t want to get on a no-fly list–that would be a huge loss. I don’t even want to miss the flight because the consumer surplus loss from being delayed even 4 hours is immense. Indeed, with my time value, everything I said applies to any trip that’s over 400 miles each way.