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What you will learn in this chapter: The meaning of consumer surplus and its relationship to the demand curve The meaning of producer surplus and its relationship to the supply curve The meaning and importance of total surplus and how it can be used both to measure the gains from trade and to evaluate the efficiency of a market How to use changes in total surplus to measure the deadweight loss of taxes Why the deadweight loss of a tax means that its true cost is more than the amount of tax revenue collected
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Individual producer surplus is the net gain to a seller from selling a good. It is equal to the difference between the price received and the sellers cost. Total producer surplus in a market is the sum of the individual producer surpluses of all the sellers of a good. Economists use the term producer surplus to refer both to individual and to total producer surplus.
2007 Worth Publishers Essentials of Economics Krugman Wells Olney 12 of 28
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The excess burden, or deadweight loss, from a tax is the extra cost in the form of inefficiency that results because the tax discourages mutually beneficial transactions.
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KEY TERMS
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Willingness to pay
Individual consumer surplus Total consumer surplus Consumer surplus
Individual producer surplus Total producer surplus Producer surplus Total surplus Excess burden Deadweight loss
Cost
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