benevolent social planner. The benevolent social planner is an all-knowing, all-powerful, well intentioned dictator The planner wants to maximize the economic well-being of everyone in society. What do you suppose this planner should do Should he just leave buyers and sellers at the equilibrium that they reach naturally on their own Or can he increase economic well-being by altering the market outcome in some way To answer this question, the planner must first decide how to measure the economic well-being of a society One possible measure is the sum of consumer and producer surplus, which we call total surplus Consumer surplus is the benefit that buyers receive from participating in a market, and producer surplus is the benefit that sellers receive. It is therefore natural to use total surplus as a measure of society’s economic well-being To better understand this measure of economic well-being, recall how we measure consumer and producer surplus We define consumer surplus as.

Total surplus in a market is the total value to buyers of the goods, as measured by their willingness to pay minus the total cost to sellers of providing those goods If an allocation of resources maximizes total surplus, we say that the allocation exhibits efficiency If an allocation is not efficient, then some of the gains from trade among buyers and sellers are not being realized For example, an allocation is inefficient if a good is not being produced by the sellers with lowest cost In this case, moving production from a high-cost” producer to a low-cost producer will lower the total cost to sellers and raise total surplus. Similarly, an allocation is inefficient if a good is not being consumed by the buyers who value it most highly In this case, moving consumption of the good from a buyer with a
low valuation to a buyer with a high valuation will raise total surplus In addition to efficiency, the social planner might also care about equity-the fairness of the distribution of well-being among the various buyers and sellers, In essence, the gains from trade in a market are like a pie to be distributed among the’ market participants. The question of efficiency is whether the pie is as big as possible. The question of equity is whether the pie is divided fairly. Evaluating the equity of a market outcome is more difficult than evaluating the efficiency Whereas efficiency is an objective goal that can be judged on strictly positive grounds, equity involves normative judgments that go beyond economics and enter into the realm of political philosophy In this chapter we concentrate on efficiency as the social planner’s goal Keep in mind, however, that real policymakers often care about equity as well. That is, they care about both the size of the economic pie and how the pie gets sliced and distributed among members of society .

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