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Price
Quantity of Output 0
Price
Demand
Consumer Welfare : Consumer welfare is generally defined as the maximisation of consumer
surplus, which is the part of total surplus given to consumers. This is realised through, direct
and explicit economic benefits received by the consumers of a particular product as measured by
its price and quality (Brodley, 1987). Clssically, consumer surplus has been used as measure of
consumer welfare. The decrease in consumers welfare can also be shown using the concept of
consumer surplus. As we know that the demand curve reflects a consumers marginal willingness
to pay which is defined as the maximum amount a consumer will spend for an extra unit. An
individuals consumer surplus is the area under the demand curve and above the market price up
to the quantity the consumer buys.
Under imperfect competition as the price become greater than marginal cost, the area of triangle
representing consumer surplus decreases. This can be seen through the following graph below:
Consumer Surplus Under Perfect competition and
imperfect competition
Quantity 0
Costs and
Revenue
Demand Marginal
revenue
Quantity under
imperfect
competition
P
m
Marginal
cost
Competitive
quantity
P > MC;
imperfect
competition
P = MC; perfect
competition
P
p.c
A
B
C
D
Area of the triangle AP
m
B is consumer surplus (CS) under imperfect competition and area of the
triangle AP
pc
C is CS in case of perfect competition. Clearly there is decrement in CS which is
equal to the area of the triangle BDC.
We can show the above discussion mathematically by assuming a linear market demand function
and linear cost function.
Let market demand function be given by P = a- y and cost function of the firm be C(y) = c*y
Under perfect competition P = MC = c (here)
Problem of firm : Max = P.y- C(y) with respect to y
For perfect competition = 0 as P= c.
Consumer surplus = area of triangle AP
pc
C = * y*(a-P) = *(a-c)
2
For imperfect competition the problem of firm reduces to Maximize (a-y)y c.y.
Solving for y we get y
m
= (a-c)/2 , P
m
= a- (a-c)/2 = (a+c)/2
Therefore consumer surplus = area of triangle AP
m
B = *(a-P
m
). y
m
= (a-c)
2
/8
CS under imperfect competition < CS under Perfect competition.
In imperfect competition, when market price rises above the competitive level, consumers
who continue to purchase the sellers' product at the new, higher price suffer a loss exactly
offset by the additional revenue that the sellers obtain at the higher price. Those who stop
buying the product suffer a loss not offset by any gain to the sellers. (Tullock, 1967).The
reason that perfect competition maximizes welfare is that in this case price equals marginal cost
at the competitive equilibrium, however in case of imperfect competition, its above the marginal
cost reducing the consumer surplus.
The consumer is better off in case of Perfect Competition as it maximizes consumer welfare and
allows them to take part in decisions such as What to produce ,how to produce and for whom to
produce by way of market forces of demand and supply leading to increased production of
desired products. No single buyer or seller can influence the prices for their own benefits.
Perfect competition is also beneficial for society at large as it directs the producers to use the
scarce resources of society in the best possible manner otherwise they will be out .This results in
minimum average cost of production and marginal cost pricing thus providing goods at lowest
possible price.
Even though perfect competition is a desired scenario but it is unrealistic as some amount of
restriction are essential in cases such as defense and other infrastructure related goods and
services. Also, in real world we come across scenarios where startup cost or transportation cost is
pretty high.
But it can not be ignored that in most of the cases imperfect competition scenarios need to be
controlled especially in case of monopoly and oligopoly. Government shall take strong steps to
protect consumers in these cases it can use antitrust laws and act against the company, it can
break the company in parts or it can pass orders against the colluding companies.
References
Alston,Julian M., Sexton, Richard J., and Zhang,M. (1997),The Effects of Imperfect
Competition on the Size and Distribution of Research Benefits, Amer. J. Agr. Econ., 79,
1252-1265
Tullock, Gordon. (1967),"The Welfare Costs of Tariffs, Monopolies, and Theft." Western
Econ. J.,224-32.
Stigler, George J. (1997),Perfect competition. Historically Contemplated, JPE, 65, 1-17
Jevons, William S.(1871),Theory of Political Economy, 1st ed.; London.111
Varian, Hal R. (1992),Microeconomic Analysis
Brodley, JF(1987), The economic goals of antitrust: efficiency, consumer welfare, and
technological progress, 62 NY Univ LR