Some thoughts on “economic efficiency”.
So I am preparing my lectures on economic efficiency and deadweight loss for my principles class and am having a bit of an existential crises.
I’ve always considered myself to be on the “progressive” side of econ - making sure I give full voice to market failure, pointing out troublesome assumptions, etc. But I have never really thought about how we measure economic surplus.
For those who have seen it, we basically take the area between supply and demand, up to the equilibrium quantity and call it surplus. It’s the difference between what consumers are willing to pay (represented by the demand curve) and what firms are willing to accept (represented by the supply curve).
BUT, when we teach demand, we say that the demand curve shows us what people are willing and ABLE to buy at each price (or what they are willing an able to pay at each quantity). That “able” does a lot of work here. It also means that what we define as economic surplus is only weakly connected to any usable idea of social utility or well-being.
Let’s take an extreme example. Suppose Jeff Bezos wants a solid gold house and rocket car. And let’s say he’s willing to pay $20bn for the house and $4bn for the car. And let’s say a builder is willing to build the house for $15bn and Elon Musk can make him a car for $2bn. Well, according to econ, that’s $7bn of “economic surplus”.
But really? Is it really the best use of resources?
My point is that the demand curve we use is not really a “marginal benefit” curve in the way we want it to be. Sure, it makes sense for an individual, but for the market, that curve is weighted towards those who are willing and ABLE to buy the goods and services in question. It is weighted toward the wealthy. So whose surplus are we maximizing?
It’s not even about equity vs. efficiency. It’s how we implicitly favor the rich in our very definition of efficiency.
Anyone else have thoughts on this? Is it just me?











