Chapter 7: The Costs of Taxation

This chapter was about the consumer surplus and producer surplus. Consumer surplus is the maximum amount they are willing to pay subtracted by the amount they are actually paid. This is their willingness to pay. Producer surplus is the amount the seller receives subtracted by the production cost. The consumer and seller actually want to have higher surpluses so the consumer would prefer to have things cheaper and the producer would have have the products at a higher price. On a demand curve, the consumer surplus is actually the area of the curve (under), while still above the price. If the price of an item was lowered, more area is created for new consumers to enter the market. On a supply curve, the producer surplus is calculated by finding the area above the curve but below the curve. Yet if the price is raised, then the total producer surplus would go up since the area is added to the existing area and more is created by the new suppliers entering the market. This chapter connects back to chapter 1 where the invisible hand guides the markets back to equilibrium where it can be most efficient. Efficient means the total surplus would be at the maximum. The chapter also talked about equity where the total surplus would be fair to both consumers and producers. There are externalities that will cause market failure, but that is when the government steps in to fix it.