Efficiency in partial equilibrium

This chapter introduces core concepts of economic efficiency in partial equilibrium settings, focusing on consumer surplus and producer surplus as measures of welfare. We define consumer surplus as the gap between willingness to pay and actual price, and producer surplus as the difference between market price and marginal cost. These tools allow us to assess how much value a market creates for consumers and producers. The chapter illustrates how a competitive market maximizes total surplus (CS + PS) and how deviations—due to price caps, quantity restrictions, taxes, or subsidies—generate deadweight loss. Using graphical and algebraic examples, we examine tax incidence, subsidy effects, and how elasticity shapes the burden and efficiency costs of policy interventions. Classic efficiency comparisons highlight how even well-intended policies can reduce the size of the economic ”pie.”