ABSTRACT
This chapter presents the topic of welfare analysis, which uses the supply-and-demand model to infer something about the benefits that consumers and producers obtain from market transactions. The definitions of consumer and producer surplus are given, including how to graphically identify these areas. The chapter then includes an examination of social efficiency, considering how price floors and price ceilings affect the benefits in an entire market. The chapter ends with a first look at the policy conclusions that are often drawn from welfare analysis, along with a summary of the situations in which markets fail to produce outcomes that can be considered “best” for society.
