Chapter 12: Consumer Surplus
Yew-Kwang Ng While consumer surplus has been regarded as superfluous or of debatable theoretical foundation, its use in cost-benefit analyses and policy discussion has been widespread. 1. THE ORIGIN OF THE CONCEPT: DUPUIT AND MARSHALL The concept of consumer surplus was first formulated by the French engineer Dupuit (1844). Marshall (1890/1920) was first in introducing the concept to the English-speaking world, but was said to be less than generous in admitting Dupuit’s priority (Pfouts, 1953, p. 316). See Hines (1999) on the history and controversies of consumer surplus and the associated Harberger triangle (on which see Chapter 13, which also discusses some issues on the use of consumer surplus areas for welfare measurement). Marshall defined consumer surplus as ‘the excess of the price which he would be willing to pay rather than go without the thing, over that which he actually does pay’ (Marshall, 1890/1920, p. 124). According to this definition, the surplus is the difference of an all-or-none comparison, that is, between (i) not being allowed to buy any quantity of the good, and (ii) buying the chosen quantity of the good at the prevailing price. As a measure of this, Marshall used the triangular area under the demand curve and above the rectangle representing the actual money expenditure of the consumer. As shown in Figure 12.1, this is measured by the curvilinear (if the demand curve is not a straight line) ΔIPA where OP is the price of the good. As pointed out by Hicks (1940, p. 109)...
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