The following article highlights the eight theoretical and practical uses of consumer’s surplus.
Use # 1. Distinction between Value-in-Use and Value-in-Exchange:
Consumer’s surplus bring into four distinction between the use value (i.e., utility) and the exchange value (i.e., the market price) of a thing.
The former is reflected in the individual demand price and the latter in the market price. Hence, consumer’s surplus shows that these’ two values are not always the same.
Use # 2. Resolving the Paradox of Value:
The concept of consumer’s surplus can also help to resolve the paradox of value. In fact, the concept makes one thing clear at least there is no paradox in a good with a high TU having a low price and MU as long as it is abundant.
Use # 3. Importance in Welfare Economics:
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The concept of consumer’s surplus has a great importance in modern welfare economics, for consumer’s surplus measures individual welfare. The greater the consumer’s surplus is, the higher the level of welfare is likely to be.
Use # 4. Measuring Gains from International Trade:
Consumer’s surplus from international transactions (say, from the trade between India and the U.K.) enables us to measure gains from international trade with different countries.
Use # 5. Comparison of Living Standard:
Further-more consumer’s surplus enjoyed by the different people at different places and in different times enables us to compare their living standard. Larger consumer’s surplus indicates a higher living standard.
Use # 6. Monopoly Pricing:
While practicing price discrimination, a monopolist may charge different prices for the same commodity from the different buyers (i.e., higher prices from the affluent buyers and lower prices from others) in such a way that none gets any consumer’s surplus.
Use # 7. External Benefits to Consumers:
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Consumer’s surplus shows how lucky the citizens of modern efficient communities are, as they are getting so many goods of daily necessities (e.g., post-cards, newspapers, telephone services, etc.) at relatively low prices. From these goods they enjoy much greater satisfaction than what they pay for these.
Similarly, no concept of consumer’s surplus enables us to compare the advantages of living at two different places. A place where there are greater amenities of life at cheaper rates will be better to live in, as the people at such a place can enjoy a larger amount of satisfaction from his spending.
Use # 8. As Guide to Public Policy:
The concept has a great practical importance to the finance minister in determining the desirability of imposing a tax on a certain commodity. A tax imposed on a commodity tends to raise its price and thus reduce consumer’s surplus, but it yields some revenue to the government.
The finance minister is to compare the loss of consumer’s surplus to the increase in tax- revenue. A tax is justified when the loss in consumer’s surplus is less than the increase in tax-revenue; otherwise it will be harmful and will lead to loss of social welfare.
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Similarly, the concept is useful to provide a case for government subsidies or bounties in some cases, where it can be shown that the additional net satisfaction possible through subsidies upon consumers will exceed the loss of satisfaction represented by the money cost involved. It shows that the concept of consumer’s surplus has a considerable importance as a guide to public policy.