Just who are those "consumers"?
While working on a principles of economics textbook, I began wondering how students evaluate terms like “consumer welfare”. Who are these consumers?
There’s a term for people who are not consumers, they are called “corpses”. All living people are consumers. So any policy that benefits consumers as a group also must, ipso facto, benefit society as a whole. Right?
Not quite, as that’s not what economists mean by ‘consumers’. We are not talking about a distinct set of people (all people are consumers); we are talking about one aspect of our lives. Thus a policy like price controls affects both consumers and producers, and hence everybody, both in our role as consumers and in our role as producers.
[You may object that we are not all producers. But those who are not, such as children and people on welfare, base their consumption on the monetary contributions of people who are producers. So in a deeper sense we all have a stake in both the consumption and production side of the economy.]
I’m probably too close to all of this to know whether these points are obvious, so I’d be interested in your take.
Let’s consider a specific example. Suppose we adopt across-the-board price controls, as in 1971. You can show the impact on “consumers” and “producers” with a supply and demand diagram:
In this graph, it looks like “consumers” might gain from price controls. But this doesn’t mean that there is some segment of society that actually gains from price controls, rather that people might gain in their role as consumers, lose in the role as producers, and lose overall due to the decline in “total surplus” (due to the deadweight loss.)
[As an aside, even consumers qua consumers might not be better off due to queuing costs.]
I wonder if students reading these textbooks think “Gee, I’m a consumer, so I better pay close attention to the effects of government policies on consumers.” If so, they are missing the bigger picture. Students should be focused on the effects of government policies on total surplus, as consumer and producer surplus are just a subset of each and every person’s interest is in both sides of a market.
I’d even apply this to individual product markets. It’s true that consumers and producers of automobiles might be very different people, but many of the policies that affect individual markets are widely applied. If you are considering the wisdom of trade barriers, it probably makes more sense to think of barriers affecting a wide range of products, as they are unlikely to only be imposed on a single good. Thus if you think to yourself, “I’m a car producer, thus I like tariffs”, beware that the tariffs don’t end up being imposed on steel and aluminum, for which you are a consumer. Indeed there’s a good chance that this is exactly what will happen in the near future, hurting the auto industry, and indeed hurting most of American manufacturing.