Wednesday, 23 September 2015

Try this: Can you maximise total surplus?

The latest issue of the Journal of Economic Education has a short one-pager (gated, but only one page long so the 'first page preview' should allow you to read all of it) by Adalbert Mayer (Washington College), pointing to this online supply-and-demand visualisation. It allows you to run a simulation model of supply and demand for some good, and can be used to demonstrate how the market allocates goods efficiently (in the sense that it maximises total surplus, or total welfare - the sum of consumer surplus and producer surplus).

See how well you can do. I suggest that after you start the simulation, click on "Select Mode" until it says "Market" and run that simulation (by repeatedly clicking "New Random Proposal"). That will give you a sense of how well the market allocates goods, and how high total surplus can be. Then use "Select Mode" to get back to "Social Planner Knowing" and try allocating the goods between buyers and sellers yourself, and see how close you can get to the market's total surplus.

Finally, for an extra challenge, try the mode "Social Planner Blind". It's pretty scary - it will show you that if social planners don't know the willingness-to-pay of buyers, or the costs of sellers, then allocating goods in an efficient (welfare-maximising) way is next to impossible.


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