Consumer’s Surplus – Definition, Significance and Criticisms

The concept of consumer’s surplus is one of the most important idea in economic theory especially in demand and welfare economics. This law was first developed by French engineer A.J Dupuit in 1844 to measure the social benefits of public commodities like canals, bridges, national highways, etc. This concept was further refined and popularized by Dr. Alfred Marshall in 1890.

The essence of the concept of consumer’s surplus is that people generally get more satisfaction or utility from the consumption of commodities than the actual price they pay for them. It has been found that people are willing to pay more price for the commodity than they actually pay for them. This extra satisfaction which the consumers obtain from buying a commodity has been called consumer’s surplus by Marshall.

The amount of money which a person is prepared to pay for a commodity indicates the amount of utility he derives from that commodity. Greater the amount of money he is willing to pay, greater the satisfaction or utility he will obtain from it. Therefore, the marginal utility of a unit of a commodity determines the price a consumer will prepare to pay for that unit.

The total utility which a person will get from a commodity will be given by the sum of marginal utilities of the units of commodities purchased or the total price which he actually pays equal to the price per unit multiplied by the number of units purchased. Thus, Consumer’s surplus = what a consumer is prepared to pay minus what he actually pays. So, C.S = Total Utility – Total amount spent.

The concept of consumer’s surplus is based on the law of diminishing marginal utility. As we purchase more units of a commodity, its marginal utility goes on diminishing. The consumer is in equilibrium when marginal utility become equal to the given price.

Significance of Consumer’s Surplus

The concept of consumer’s surplus has great practical importance, which are as follows:

1. Importance in public finance: Consumer’s surplus is useful to a finance minister in imposing taxes and fixing their rates. He will tax those commodities in which the consumers enjoying much surplus. In such cases, the people would be willing to pay more than they actually pay. Such tax will bring more revenue to the state.
2. Importance to businessman and monopolist: The concept of consumer’s surplus is very useful to the businessman. He can raise price of those commodities in which there is a large consumer’s surplus. The seller will be able to raise price if he is monopolist and control the supply of the commodity.
3. Comparing advantages of different places: The concept of consumer’s surplus enables us to compare the advantages of environment and opportunities. A person living in a developed area enjoys greater consumer’s surplus than a person living in a remote area because the former is able to get all the amenities of life cheaply and easily. It also enables us to compare standard of living of the people living in different parts of the world. The larger the consumer’s surplus the better off is the people.
4. Measuring benefits from international trade: We can measure the benefit from international trade with the idea of consumer’s surplus. Suppose that before entering into trade with another country we are prepared to pay $ 1000 for a computer. But after establishing trade relation, we get it for $ 750. The difference between what we were prepared to pay for the computer and what we actually pay is the consumer’s surplus which measures the benefit fro international trade.
5. Distinction between value in use and value in exchange: The concept of consumer’s surplus helps us to distinguish between value in use and value in exchange. Value in use means utility and value in exchange means the price of a commodity. Commodities like salt, post card, match box etc. have a great value in use but a very small value in exchange. Consumer’s surplus from such commodities is very large because we are prepared to pay much more for such commodities than we actually pay.

Criticisms of Consumer’s Surplus

The concept of consumer’s surplus has been criticized on several grounds as follows:

1. Imaginary: The concept of consumer’s surplus is a purely imaginary idea. We just imagine what we are prepared to pay and subtract what we actually pay. It is all hypothetical.
2. Utility is not measurable: The concept of consumer’s surplus is based on the assumption that utility can be measured quantitatively in term of money. But utility is a subjective concept. Therefore, utility cannot be measured quantitatively.
3. Marginal utility of money not constant: The concept of consumer’s surplus supposes that the marginal utility of money remains constant throughout the process of exchange. But the marginal utility of money does not remain constant. When a consumer spends his given money income on the purchase of a commodity, the amount of money left him is reduced and its marginal utility to him increases. While calculating consumer’s surplus, we do not take into consideration this change in the marginal utility of money.
4. Not applicable to necessaries: The concept of consumer’s surplus does not apply to necessaries of life or conventional necessaries. The price of necessaries is very low whereas utility derived from them is very high. Therefore, consumer’s surplus from them is infinite when a man is dying of thirst, he may be prepared to pay any amount of money for a glass of water.
5. Neglect complementary commodities: Marshall assumes that the utility of a commodity depends upon the supply of that commodity alone. He neglect the problem of complementary of commodities. Thus, he considers one commodity as independent of the others.
6. Neglect Substitutes: This concept assumes the absence of substitutes of the commodity from which the consumer derives the surplus because the presence of substitutes like tea and coffee would make the measurement of consumer’s surplus difficult.