Measuring Waste from Inefficiency

An attractive feature of competitive markets is that they maximize the sum of consumer and producer surplus. Producer and consumer surplus are shown in the market supply and market demand diagram in Figure 7-4. Recall that the producer surplus for all producers is the area above the supply curve and below the market price line, and that the consumer surplus for all consumers is the area below the demand curve and above the market price line. Both the consumer surplus and the producer surplus are shown in Figure 7-4. The lightly shaded gray area is the sum of consumer surplus plus producer surplus. The equilibrium quantity is at the intersection of the two curves.